Question

Stock A has a beta of 1.8 and is farily priced. The riskless rate of return (US Treasury Bills) is 2.2%. The market risk premium is 5.3%. Construct a $100,000 portfolio of stock A and Treasury Bills that will have an expected return of 9.069%. (Rounded to the nearest dollar.) $ invested in stock A invested in T-Bills

Answer 1

Expected return = risk free rate + beta * market risk premium

=>

Expected return = 2.2% + 1.8 * 5.3%

= 11.74%

let x be proportion invested in stock A

=>

x * 11.74% + (1-x) * 2.2% = 9.069%

=>

0.1174x + 0.022 - 0.022x = 0.09069

=>

x = 0.72

=>

amount invested in stock A = 0.72 * 100000 = 72000

amount invested in T-bills = 100000 - 72000 = 28000