Question

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

You want to create a portfolio equally as risky as the market, and you have \$1,000,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Asset Investment Beta

Stock A \$165,000 0.80

Stock B \$350,000 1.09

Stock C ? 1.27

Risk-Free Asset ? ?

 Weight of Stock A (WA) = \$165,000/1,000,000 = 0.165 Weight of Stock B (WB) = \$350,000/1,000,000 = 0.35 If, portfoli is as risk as market, the beta of the portfolio must be equal to 1. By using porfoli beta formula we can find weight of Stock C βp =1 = WA x (0.80) + WA x (1.09) + WC x (1.27) + Wrf (0) 1 = 0.165x (0.80) + 0.35 x (1.09) + WC x (1.27) + Wrf (0) 1 = 0.1320 + 0.3815 + WC x (1.27) + 0 Wc x1.27 = 1-0.1320-0.3815 Wc = 0.4865/1.27 Wc =0.38307087 So, Dollor investment in Stock C = 1,000,000 X 0.3831 = \$383,070.87 Investment in Risk free asset = 1,000,000-165,000-350,000-383,070.87 = \$ 101,929.13 Beta of risk free asset is zero.

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