Question

Answer the following question based on the following information: An investor is considering the following three stocks to invest. Suppose that the current T-bill rate is 5% and the market rate of return is 13%. Stock A Stock B Stock C Beta 1.3 1.0 0.7 Suppose that the investor has invested $100,000 in stock A and $100,000 in stock B. How much should he/she invest in stock C so that he/she can expect 14% rate of return from the portfolio? Group of answer choices $9.090.91 $0.00 $11,764.71 $5,124.76 $12,564.94

Answer 1

Return of a Portfolio = Weighted average return of all stocks inside the portfolio

Calculating Return using CAPM Model Re =Rf + Beta x (Rm-Rf)

Rf = Risk free return = 5%

Rm = Return of Market = 13%

Return of Stock A =5 + 1.3 (8) =15.4%

Return of Stock B =5 + 1 (8) =13%

Return of Stock C =5 + 0.7 (8) =10.6%

Lets Assume the amount Invested in Stock C be Y

Amount Invested in Stock A =100,000

Amount Invested in Stock B=100,000

Amount Invested in Stock C =Y

Total Investment in Portfolio =200,000+Y

Our Required Return on Portfolio is 13%;

Return of a Portfolio = Weighted average return of all stocks inside the portfolio

Return of a Portfolio = Return of A x Weight of A + Return of B x Weight of B +Return of C x Weight of C.

13% = 15.6% x(100,000 /(200,000+ Y)) + 13% x (100,000 /(200,000+ Y)) +10.6% x (Y /(200,000+ Y)

Solving the Above Equation we get Y =$90,090.91