Question

# You want to create a portfolio equally as risky as the market, and you have \$1,400,000...

 You want to create a portfolio equally as risky as the market, and you have \$1,400,000 to invest. Consider the following information:

 Asset Investment Beta Stock A \$420,000 0.90 Stock B \$420,000 1.15 Stock C 1.45 Risk-free asset

 Required:
 (a) What is the investment in Stock C? (Do not round your intermediate calculations.) (Click to select)\$356,855\$353,138\$371,724\$386,593\$241,879

 (b) What is the investment in risk-free asset? (Do not round your intermediate calculations.) (Click to select)\$188,276\$318,121\$178,862\$180,745\$195,807

(A) Weight of stock C be X :

Total investment is \$140,000 and the combined investment in A and B is \$840,000

So, the remaining investment in asset C and risk free asset will be combined investment of \$560,000

So, be investment in stock C is X ,

Investment in risk free asset = (\$5,60,000 - X)

Portfolio beta should be 1 :

4,20,000/14,00,000 *0.9 + 4,20,000/14,00,000*1.15 + x/ 14,00,000 = 1

or, \$37,8000 + 483,000 + 1.45 X = 14,00,000

So, X = \$371724.1379

= X = \$37,1724

Correct option is option C.

(B) Investment in risk free asset = (\$5,60,000 - \$371724.1379 = \$188,275.8621

= \$188,276

Correct option is option A .

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