Question

You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock

Answer 1

Answer:

46.5%

Explanation:

The treasury bills have zero beta as they have no systematic risk. Beta is used in the Capital asset pricing Model to demonstrate a relationship between systematic risk and rate of return.

Expected Return = Rf + Beta * Rp

The percentage that should be invested in the risky portfolio will be,

1 - 1 / Beta

1 - 1 / 1.87

= 46.5%