You want to create a portfolio equally as risky as the market, and you have $1,400,000...

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You want to create a portfolio equally as risky as the market, and you have $1,400,000 to invest. Consider the following info

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Answer 1

Answer #1

Total Stock A + Stock B value = Value of Stock A + Value of Stock B

=490000+210000

=700000

Weight of Stock A = Value of Stock A/Total Stock A + Stock B Value

= 490000/700000

=0.7

Weight of Stock B = Value of Stock B/Total Stock A + Stock B Value

= 210000/700000

=0.3

Beta of Stock A + Stock B = Weight of Stock A*Beta of Stock A+Weight of Stock B*Beta of Stock B

Beta of Stock A + Stock B = 0.7*0.7+1.2*0.3

Beta of Stock A + Stock B = 0.85

Total Total portfolio value = Value of Remaining portfolio + Value of Stock A + Stock B

=700000+700000

=1400000

Weight of Remaining portfolio = Value of Remaining portfolio/Total Total portfolio Value

= 700000/1400000

=0.5

Weight of Stock A + Stock B = Value of Stock A + Stock B/Total Total portfolio Value

= 700000/1400000

=0.5

Beta of Total portfolio = Weight of Remaining portfolio*Beta of Remaining portfolio+Weight of Stock A + Stock B*Beta of Stock A + Stock B

1 = Beta of Remaining portfolio*0.5+0.85*0.5

Beta of Remaining portfolio = Weight of Stock C*Beta of Stock C+Weight of Risk free asset*Beta of Risk free asset

1.15 = 1.45*Weight of Stock C+0*(1-weight of Stock C)

Weight of Stock C = 0.79310345

Weight of Risk free asset =1-weight of Stock C=1-0.79310345=0.20689655

Amount invested in Stock C=Weight of Stock C in remaining portfolio * remaining portfolio value

=700000*0.7931034483=555172.41

Amount invested in Risk free asset=Weight of Risk free asset in remaining portfolio * remaining portfolio value

=700000*0.2068965517=144827.59

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Answer 2

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