Question

You would like to combine a risky stock with a beta of 0.71 with U.S. Treasury bills (risk free asset) in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock? Only Enter the Final Answer in Decimals.

Select one of the following:

0.478

1.408

0.61

1.136

1.639

Answer 1

The % is computed as shown below:

Beta of portfolio = beta of risky stock x weight of risky stock + beta of US Treasury bills x weight of US Treasury bills

1 = 0.71 x weight of risky stock + 0 x weight of US treasury bills

weight of risky stock = 1 / 0.71

weight of risky stock = 1.408 Approximately

Note that the beta of portfolio is 1 since it is equal to risk level of the overall market and the beta of risk free asset is zero.

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