Question

You want to create a portfolio equally as risky as the market, and you have $1,400,000 to invest. Given this information, fill in the rest of the following table: (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.)

Asset	Investment	Beta
Stock A	$196,000	1.10
Stock B	$350,000	1.40
Stock C		1.60
Risk-free asset		0

Answer 1

Let investment in C=$x

Hence investment in risk free asset=1,400,000-(196,000+350,000+x)=$(854,000-x)

Portfolio beta=Respective beta*Respective weight

1=(196,000/1,400,000*1.1)+(350,000/1,400,000*1.4)+(x/1,400,000*1.6)+(854,000-x)/1,400,000*0[Beta of market=1;Beta of risk-free assets=0]

1=0.504+(x/1,400,000*1.6)

x=(1-0.504)*1,400,000/1.6

=$434,000=investment in C

Hence investment in risk free asset=$(854,000-x)

=$420,000

Asset	Investment	Beta
Stock A	196,000	1.10
Stock B	350,000	1.40
Stock C	434,000	1.60
Risk-free asset	420,000	0