Problem 11-27 Analyzing a Portfolio [LO 2] want to create a portfolio equally as

Question

Problem 11-27 Analyzing a Portfolio [LO 2] want to create a portfolio equally as risky as the market, and you have $500,000 to invest nformation about the possible investments is given below. Stock A Slook B Stock C $143,000 137,000 1.33 1.48 Risk-free asset How much will you invest in Stock C? (Do not round intermediate calculations and round your answer to 2 decimal places, e.932.16) Investment in Stock C How much will you invest in the risk-free asset? (Do not round intermediate calculations and round your answer to 2 decimal places, o.g. 32.16) Investment in risk-free asset

Explanation / Answer

Let investment in C=$x

Hence investment in risk free asset=500,000-(143000-137000-x)=$(220,000-x)

Portfolio beta=Respective betas*Respective weights

1=(143000/500,000*0.88)+(137000/500,000*1.33)+(x/500,000*1.48)+(220,000-x)/500,000*0[Beta of risk free asset=0]

1=0.25168+0.36442+(x/500,000*1.48)

Hence x=investment in Stock C=[1-0.25168-0.36442]*500,000/1.48

=$129,695.95(Approx)

Hence investment in risk free asset=(220,000-129695.95)=$90304.05(Approx).

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