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12 You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. You must invest all of y13 Based on the following information: 6.25 points State of Economy Depression Recession Normal Boom Probability of State of

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Answer #1

We want our Portfolio as Risky as market portfolio. Market risk or beta is always 1. So our Portfolio beta is 1      
   1000000  
Investment in A   280000  
Investment in B   400000  
remaining amount = 1000000-280000-400000=   320000  
Assume Investment in stock C =   x  
So Investment in risk free = 320000-x      
      
Portfolio beta = Sum of (Amount * beta of security)/Total Investment      
      
Beta of Stock A=   0.95  
Beta of stock B=   1.2  
Beta of stock C=   1.45  
Beta of risk free is always   0  
      
Portfolio beta = Sum of (Amount * beta of security)/Total Investment      
1 = ((280000*0.95)+(400000*1.2)+(x*1.45)+((320000-x)*0))/1000000      
1000000*1= 746000+1.45x      
1.45x =   254000  
x=254000/1.45=   175172.4138  
      
So Investment in Stock C=   175,172.41  
Investment in riskfree = 320000-175172.41=   144,827.59  
      

Note: separate first question is answered as HOMEWORKLIB policy

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