Question

# You want to create a portfolio equally as risky as the market, and you have \$1,100,000...

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.)

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

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