Question

Analyzing a PortfolioYou want to create a portfolio equally as risky as the market and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta Stock A $190,000 .83 Stock B $325,000 1.19 Stock C 1.45 Risk-free asset

Answer 1

Amount to be invested in Stock C and Risk free asset = 1,000,000-190,000-325,000

= $485,000

Beta of risk free asset is 0

Portfolio beta is equal to the weighted average beta

Market beta = 1

Let the amount invested in Stock C be x

In Risk free = (485,000-x)

1 = 0.83*190,000/1,000,000 + 1.19*325,000/1,000,000 + 1.45*x/1,000,000 + 0*(485,000-x)/1000,000

1 = 0.54445 + 1.45x/1,000,000

X = $314,172.41

Hence, amount invested in stock C = $314,172.41

In Risk free Asset = 485,000 – 314,172.41 = $170,827.59

Beta of Risk free = 0