Question

Chapter 06 Practice Test Question 17 15 Asset Allocation Between Risky and Riskless Investments You have a risky portfolio with a beta of 1.3. You wish to reduce the portfolio beta to 0.3. In order to do this you will change your asset allocation and add risk free government bonds. What percentage of your investment should be in government bonds and what percentage should be in the risky portfolio to accomplish your goal? points Skipped Multiple Choice eBook Print O 23.08% References O 19.57% O ) 16.56% o 27.24%

Answer 1

Beta of portfolio is weighted average of the beta of constituents.

Beta of portfolio = Beta1 * Weight1 + Beta2 * Weight2

Now for a risk free asset, beta = 0

0.3 = 1.3 * Weight of Risky portfolio + 0 * Weight in risk free Govt bonds

0.3 = 1.3 * Weight of Risky portfolio

Weight of risky portfolio = 23.08%

Weight in Govt Bond = 1 -23.08% = 76.92%