Use the following information to answer Q4-Q5 You have $100,000 to invest in a p
ID: 2790694 • Letter: U
Question
Use the following information to answer Q4-Q5 You have $100,000 to invest in a portfolio containing stock X and stock Y. If stock X has an expected return of 11.4% and a beta of 1.25. Stock Y has an expected return of 8.68% and a beta of 0.85 4. If your goal is to create a portfolio that has an expected return of 10.312 percent, how much will you invest in stock Y? (7pts) 5. If your goal is to create a portfolio that has a beta that is the same as the beta of the market, how much should you invest in stock Y? (7pts)Explanation / Answer
Let the A be he amount invest in stock Y ,so amount of investment made in stock X be (100000-A)
Weight of Y=A /100000
Weight of X =[100000-A]/100000
Expected return of portfolio =[Rx*Wx]+[Ry*Wy]
10.312 =[11.4* (100000-A)/100000] +[8.68*A/100000]
10.312 = [.000114*(100000-A)] + [8.68A/100000]
10.312 = 11.4 -.000114 A +.0000868A
10.312 =11.4 - 0000272 A
.0000272A =11.4-10.312
A = 1.088/.0000272
= 40000
Amount invested in y= $40000
X=100000-40000=60000
5)Beta of market is 1 so beta of portfolio will be 1
1 = [1.25*(100000-A)/100000]+[.85*A/100000]
1 = [.0000125(100000-A) ] + [.0000085A]
= 1.25-.0000125A +.0000085A
= 1.25 - .000004A
.000004 A = 1.25-1
A = .25/.000004
= $ 62500
Amount invested in Y =$62500