Question

# You want to create a portfolio equally as risky as the market, and you have \$1,200,000...

 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.)

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).