Question

You have $100,000 to invest in a portfolio containing Stock Q and Stock K. Your goal is to create a portfolio that has an expected return of 12.7 percent. If Stock Q has an expected return of 11.4 percent and a beta of 1.25, and Stock K has an expected return of 14.8 percent and a beta of 2.85: 1. How much money will you invest in the two stocks? 2. What is the beta of your portfolio? Required: Answer the two questions with your computations on paper or in Excel.

Please answer both questions on an excel sheet with the steps! Thanks

Answer 1

Given $100,000 Amoun to be invested Portfolio expected return 12.70% Stock Q expected return 11.40% Stock Q Beta 1.25 Stock K expected return 14.80% Stock K Beta 2.85 Solution Assume x% to be investment in Stock Q. Hence investment in Stock K is (100-x)% Using above information, Let's form an equation:- 11.40% x 14.80% (1 - x) 12.70% 12.70% 11.40 x 14.80% - 14.80% x -2.10% -3.40% x 2.10% X 3.40% 61.765% Hence investment in Stock Q must be 61.765%, while investment in Stock K must be 38.235%. Part 1: Money to be invested in two Stocks Money to be invested Amount to be invested X investment % Hence, 100000 X 61.765% = $61765 Money to be invested in Stock Q 100000 X 38.235% = $38235 Money to be invested in Stock K = Part 2: Portfolio Beta Portfolio Beta = Beta of Stock Q X Investment % in Stock Q Beta of Stock K X Investment % in Stock K Hence, Portfolio Beta = 1.25 X 61.765% +2.85 X 38.235% = 1.86 Hence, Portfolio Beta is 1.86