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: AssetInvestmentBeta Stock A$139,000 .84 Stock B$141,000 1.29 Stock C 1.44 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.)

Answer 1

Answer:

Let investment in C = $x

Hence, investment in risk free asset = 500,000 - (139,000+141,000+x) = $220 - $x

1 = (139,000/500,000*0.84)+(141,000/500,000*1.29)+(x/500,000*1.44)+(220,000-x)/500,000*0 [Beta of market=1 ;Beta of risk-free assets=0]

1 = 0.23352+0.36378 + (x/500,000*1.44)

1 = 0.5973 + (x/500,000*1.44)

x = (1 - 0.5973)*500,000/1.44

x = 0.4027*347222.22

x = 139826.387994

x = $139,826.39

investment in C = $139,826.39

Hence, investment in risk free asset = $(220,000-x)  = $220,000 - $139,826.39

Investment in risk free asset = $80,173.61