Question

You want to invest $40,000 in a portfolio with a beta of no more than 1.37 and an expected return of 12.1%. Bay Corp. has a beta of 1.03 and an expected return of 10.1%, and City Inc. has a beta of 1.82 and an expected return of 14.77%. The risk-free rate is 4%. Is it possible to create this portfolio investing in Bay Corp. and City Inc.? If so, how much will you invest in each? (Select from the drop-down menu.) Is it possible to create this portfolio investing in Bay Corp. and City Inc.? No Yes Can't determine

Answer 1

Let w be the weight of Bay Corp and 1-w be the weight of City Inc
Hence,
Beta<=1.37
w*1.03+(1-w)*1.82<=1.37
=>w<=(1.37-1.82)/(1.03-1.82)
=>w<=0.569620

Expected return=0.569620*10.1%+(1-0.569620)*14.77%=12.1099%

Yes it is possible
Amount in Bay=0.569620*40000=22784.80
Amount in City=(1-0.569620)*40000=17215.20