Question

2. You have $200,000 to invest in Stock D, Stock E, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 15 percent If D has an expected return of 18 percent and a beta of 1.50, E has an expected return of 15.2 percent and a beta of 1.15, and the risk-free rate is 6 percent, and if you invest $60,000 in Stock D, how much will you invest in Stock E? 3. Brighton, Inc. has bonds outstanding that will mature 12 years from today with a coupon interest rate of 7% paid semi-annually. If investors require 5% YTM for the next 3 years and 6% thereafter, what is the maximum price you are willing to pay?

Answer 1

2. Portfolio return =15%
Weight of Stock D =60000/200000=30%
return of D =18%
Weight of Stock E =x
return of Stock E =15.2%
Let Weight of Risk free asset =1-x
Return of Risk free =6%
Weight of Stock D*Return of D+Weight of Stock E*Return of Stock E+Weight of Risk free asset*Return of Risk free asset=15%
30%*18%+x*15.2%+(1-x)*6% =15%
5.4%+6%+x*(15.2%-6%) =15%
x =(15%-5.4%-6%)/(15.2%-6%) =39.13043478%

The amount invested in Stock E =39.13043478%*200000=78260.87