Question

You have $110,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 10 percent and that has only 74 percent of the risk of the overall market. If X has an expected return of 30 percent and a beta of 2.0, Y has an expected return of 20 percent and a beta of 1.2, and the risk-free rate is 4 percent, how much money will you invest in Stock Y?

Answer #1

Let amount invested in Stock X, Stock Y and Risk free asset be denoted by | |||||||

X, Y and R | |||||||

There are three equations to be solved | |||||||

X + Y + R = 110000 | |||||||

30X+20Y+4R=10*(X+Y+R) | |||||||

2X+1.2Y=0.74 | |||||||

Solving this three equations we have | |||||||

X | -989985 | ||||||

Y |
1649976 |
||||||

R | -549991 | ||||||

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