Question

COMPANY	TICKER SYMBOL
3M	MMM
American express	AXP
Apple	AAPL
Boeing	BA
Caterpillar	CAT
Chevron	CVX
Cisco	CSCO
Coca Cola	KO
Disney	DIS
Dow Chemical	DOW

Assume your goal is to create a portfolio whose beta is 1.0. Using only the ten stocks you identified above, create a portfolio whose beta is as close to 1.0 as you are able. Here are the constraints on your portfolio:

a. The total invested amount is $100,000

b. No single stock investment can exceed $20,000

c.No single stock investment can be less than $5,000

d. You must invest in a minimum of 8 stocks. your answer should show 1) each stock, 2) the amount of the investment in that stock, 3) the overall beta for your portfolio, and 3) how you calculated that beta.

Answer 1

first of all, we need to understand beta close to 1 means risk equivalent to market and less than 1 means risk less than the market and vice-versa

formula for beta of portfolio is=w1b1+w2b2-------wnbn

the minimum limitis 5000 means which means we cannot give the weightage below 5% and 20,000 of 1 lac means the maximum cap is 20%. o the concept is giving more weightage to the of stock whose value is equal or less than 1 and less weightage to a stock whose beta is more than 1

COMPANY beta weight in decimal weight*beta 0.71 0.2 0.142 3M 1.13 American express Apple Boeing 0.15 0.05 0 0.1695 0.0585 1.17 1.61 0.05 Caterpillar Chevron Cisco 1.36 1.23 0.068 0.0615 0.05 0.2 0.21 0.65 0.2 0.1 0.13 0.102 1.02 Coca Cola Disney Dow Chemical 0.05 0.0695 portfolio beta 1.001