Question

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given the following information, provide the missing data in the table: (Round your answers to 2 decimal places.)

Asset Investment Beta

Stock A $145,000 0.85

Stock B $412,000 1.09

Stock C ??? 1.38

Risk Free Asset ??? ???

Answer 1

Let investment in C=$x

Hence investment in risk free asset=1,000,000-(145,000+412,000+x)

=$(443,000-x)

Portfolio beta=Respective beta*Respective weight

1=(145,000/1,000,000*0.85)+(412,000/1,000,000*1.09)+(x/1,000,000*1.38)+(443,000-x)/1,000,000*0[Beta of market=1;Beta of risk-free assets=0]   

1=0.57233+(x/1,000,000*1.38)

x=(1-0.57233)*1,000,000/1.38

=$309905.8(Approx)=investment in C

Hence investment in risk free asset =$(443,000-x)

=$133094.2

Beta of risk free assets=0