Question

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

Answer 1

(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 .