Question

You want to create a portfolio equally as risky as the market, and you have $500,000 to invest Information about the possible investments is given below: Asset Investment Beta $142.000 $138,000 Stock A 87 Stock B Stock C 1.32 1.47 Risk-free asset How much will you invest in Stock C? How much will you invest in the risk-free asset? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Investment in Stock C Investment in risk-free asset

Answer 1

Let investment in C=$x

Hence investment in risk free asset=500,000-(142,000+138,000+x)=$(220,000-x)

Portfolio beta=respective beta*Respective investment weight

1=(142,000/500,000*0.87)+(138,000/500,000*1.32)+(x/500,000*1.47)+(220,000-x)/500,000*0[Beta of market=1;Beta of risk-free assets=0]

1=0.6114+(x/500,000*1.47)

x=(1-0.6114)*500,000/1.47

=$132176.87(Approx).=investment in C

Investment in risk free asset=(220,000-x)

=$87823.13(Approx).