Question

You want to create a portfolio equally as risky as the market, and you have $1,100,000 to invest. Consider the following information:

Asset

Investment

Beta

Stock A

$330,000

0.70

Stock B

$220,000

1.25

Stock C

1.50

Risk-free asset

Required:

(a)	What is the investment in Stock C? (Do not round your intermediate calculations.) (b)What is the investment in risk-free asset? (Do not round your intermediate calculations.)

Answer 1

Let us assume the investment in stock C=x so the investment is risk-free asset is equal to (1,100,000 -330000 -220000 -x)

C = x

Risk free asset = 550000 - x

The beta of the market portfolio is equal to one

[330000 *.70 + 220000 *1.25 + x * 1.50 + (550000 -x) * 0] / 1100000 = 1 [Beta of risk free asset is zero]

[506000 + x * 1.50 ] = 1100000  

x = $396000

550000 -x = $154000

a) Investment in Stock C = $396000

b) Investment in risk-free asset = $154000