Question

You currently own the given below portfolio valued at $76,000. Your portfolio includes Stock A, Stock B, and a Risk-Free asset. You want your portfolio to be equally as risky as the market. Given this information, fill in the rest of the following table? Asset Value Beta Stock A $13,800 1.21 Stock B ? 1.08 Risk-Free ? ? Portfolio $76,000 ?

a. What is the Portfolio Beta and the Risk Free Asset Beta? Note: Do not round your intermediate calculations (keep at least 4 decimal places, e.g., 0.1616)! Enter your final answers as rounded to 2 decimal places (e.g., 32.16)!

b. What is the amount invested in Stock B and the Risk-Free Asset? Note: Do not round your intermediate calculations (keep at least 4 decimal places, e.g., 0.1616)! Enter your final answers as rounded to the nearest integer!

Answer 1

a. Risk Free Asset Beta = 0 (Risk free asset always have zero beta)

Portfolio Beta = 1 (Because we want portfolio beta to be equal to market)

b. Amount invested in Stock B

Portfolio Beta = weight of Stock A * Beta of Stock A + Weight of Stock B * Beta of Stock B

1 = (13800 / 76000) * 1.21 + (X/76000) * 1.08

1 = 0.1816 * 1.21 + (X/76000) * 1.08

1 = 0.2197 + (X/76000) * 1.08

Amount invested in B X = $54909

Amount Invested in Risk Free Asset = $76000 - 54909.26 - 13800 = $7291

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