Question

b) You want to create a portfolio twice as risky as the market, and you have $500,000 to invest. Given this information, fill in the rest of this table:

ASSET	INVESTMENT	BETA
Share A	$150,000	1.5
Share B	$200,000	2
Share C		2.5
Risk-free asset

Answer 1

Let investment in C=$x

Hence investment in risk free asset=500,000-(150,000+200,000+x)

=$(150,000-x)

Portfolio beta=Respective beta*Respective weight

(2*1)=(150,000/500,000*1.5)+(200,000/500,000*2)+(x/500,000*2.5)+(150,000-x)/500,000*0[NOTE:Beta of market=1;Beta of risk-free assets=0]

2=1.25+(x/500,000*2.5)

x=(2-1.25)*500,000/2.5

=$150,000=investment in C

Hence investment in risk free asset=(150,000-x)

=0

Asset	Investment	Beta
A	150,000	1.5
B	200,000	2
C	$150,000	2.5
Risk free asset	0	0