Question

You want to create a portfolio equally as risky as the market, and you have $1,200,000 to invest. Consider the following information: |

Asset | Investment | Beta |

Stock A | $420,000 | 0.70 |

Stock B | $300,000 | 1.25 |

Stock C | 1.40 | |

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 investment in C=$x

Hence investment in risk-free asset=1,200,000-(420,000+300,000+x)=$(480,000-x)

Portfolio beta=Respective beta*Respective investment weight

1=(420,000/1,200,000*0.7)+(300,000/1,200,000*1.25)+(x/1,200,000*1.4)+(480,000-x)/1,200,000*0[Beta of risk-free asset=0][Beta of market=1]

1=0.5575+(x/1,200,000*1.4)

x=(1-0.5575)*1,200,000/1.4

**$379,285.71=investment in Stock C(Approx).**

**Hence investment in risk-free
asset**=(480,000-379285.71)=**$100,714.29(Approx).**

You want to create a portfolio equally as risky as the market,
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Beta
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0.70
Stock B
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What is the investment in risk-free asset? (Do not
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