Question

You want to invest $49 000 in a portfolio with a beta of no more than 1.47and an expected return of 11.5?%. Bay Corporation has a beta of 1.17 and an expected return of 10.4?%, and City Limited has a beta of 1.71 and an expected return of 12.43?%. The? risk-free rate is 6?%.

Is it possible to create this portfolio investing in Bay Corporation and City? Limited? If? so, how much will you invest in? each

Answer 1

In this question we are given that the total Investment = $49,000

We are to create a portfolio of two stocks namely Bay Corp and City Ild

The E(R_p) = 11.50 %, So what we need to do is to determine the amount to investIn each of the two stocks that is their weights

10.40 = 6 + 1.17 (MRP)

12.43 = 6 + 1.71 (MRP)

Equation 2 - 1

2.03 = 0.54 MRP

MRP = 3.76

MRP = R_M- rf

3.76 = R_M - 6

R_M = 9.76

E(Ri) = 11.5 = Rf + ?p (MRP)

11.5 = 6 +  ?p (3.76)

?p = 1.47

11.5 % = WB(10.40%) + WC(12.43%)

11.5 % = WB(10.40%) + (1 – WB) (12.43%)

11.50% = 10.40 WB + 12.43 - 12.43 WB

0.93 = 2.03 WB

WB = 0.46

WC = 1 - 0.46 = 0.54

Bay Corp = 0.46 * $ 49,000 = 22540

City Inc = 0.54 * $ 49,000 = 26460

	Beta, B	Expected Return (ER)	Weight	Investment
BAY CORP	1.17	10.4	0.46	22540
CITY INC	1.71	12.43	0.54	26460
PORTFOLIO	1.47	11.5	1	49000