Question

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Consider the following information:

  

Asset	Investment	Beta
Stock A	$200,000	0.90
Stock B	$350,000	1.30
Stock C		1.40
Risk-free asset

  

What is the investment in Stock C?

What is the investment in risk-free asset?

Answer 1

Let investment in C=$x

Hence investment in risk-free asset=1,000,000-(200,000+350,000+x)=$(450,000-x)

Portfolio beta=Respective beta*Respective investment weight

1=(200.000/1,000,000*0.9)+(350,000/1,000,000*1.3)+(x/1,000,000*1.4)+(450,000-x)/1,000,000*0[Beta of market=1;Beta of risk-free assets=0]

1=0.635+(x/1,000,000*1.4)

x=(1-0.635)*1,000,000/1.4

=$260,714.29(Approx)=investment in C

Investment in risk-free asset=(450,000-x)

=$189,285.71(Approx).

Beta of risk-free assets=0