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Analyzing a Portfolio: You have $100,000 to invest in a portfolio containing Stock X and Stock...

Analyzing a Portfolio: You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of18.5 percent. If Stock X has an expected return of 17.2 percent and a beta of 1.4, and Stock Y has an expected return of 13.6 percent and a beta of 0.95, how muchmoney will you invest in Stock Y? How do you interpret your answer? What is the beta of your Portfolio?
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Answer #1

Total investment is $100,000

Portfolio expected return is 18.5%

Expected return on Stock X is 17.2%

Beta of Stock X is 1.4

Expected return on Stock Y is 13.6%

Beta of Stock Y is 0.95

Calculate the money invested in stock Y:

Particulars

E(R)

Beta

Stock X:

17.2%

1.4

Stock Y:

13.6%

0.95

Let $x is invested in stock X

Weight of stock Y is (1 x)

Weight of stock Y is (1-1.36111)

Weight of stock Y is -0.36111

Money to be invested in stock Y is ($100,000 -0.36111)

Money to be invested in stock Y is -$36,111

Calculate the beta of portfolio:

Portfolio beta is 1.56

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