Question

You have $200,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 14.4 percent. Stock X has an expected return of 12.62 percent and a beta of 1.26 and Stock Y has an expected return of 8.84 percent and a beta of .72.

How much money will you invest in Stock Y? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

What is the beta of your portfolio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Expected return of Portfolio = Weight of Stock X*Expected return of Stock X+Weight of Stock Y*Expected return of Stock Y

14.4 = 12.62*Weight of Stock X+8.84*(1-weight of Stock X)

Weight of Stock X = 1.4709

Weight of Stock Y = 1- Weight of Stock X=1-1.4709 = -0.4709

Amount to invest in Y = weight in Y*portfolio amount = -0.47089947*200000=-94179.89

Weight of Stock X = 1.4709

Weight of Stock Y = -0.4709

Beta of Portfolio = Weight of Stock X*Beta of Stock X+Weight of Stock Y*Beta of Stock Y

Beta of Portfolio = 1.26*1.4709+0.72*-0.4709

Beta of Portfolio = 1.51