Answer: See explanation
Explanation:
a. How much money will you invest in Stock Y?
Let the weight of Stock X = x
Let the weight of Stock Y = (1 - x)
Expected return of stock X = 11.4%
Beta of stock X = 1.25
Expected return of stock Y = 8.68%
Beta of stock X = 0.85
The Portfolio Return will then be calculated as:
= (Weight of Stock X × Return of Stock X) + (Weight of Stock Y × Return of Stock Y)
0.127 = [x × 0.114 + (1 - x) × 0.0868]
0.127 = [x × 0.114 + 0.0868 - x × 0.0868]
0.127 = x × 0.0272 + 0.0868
0.127 - 0.0868 = x × 0.0272
0.0402 = 0.0272x
x = 0.402/0.0272
x = 1.4779
Weight of Stock X = 1.4779
Therefore, Weight of Stock Y will be:
= 1 - 1.4779
= -0.4779
The amount that's invested in Stock Y will be:
= $100,000 × (-0.4779)
= -$47,790
b. What is the beta of your portfolio?
Portfolio Beta will be calculated as:
= 1.4779 × 1.25 + (-0.4779) × 0.85
= 1.44
