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You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below: Asset Investment Beta Stock A $ 146,000 .91 Stock B $ 134,000 1.36 Stock C 1.51 Risk-free asset How much will you invest in Stock C

Respuesta :

Shahzaibfaraz

Answer:

Investment in stock C is $122450.3311 rounded off to $122450.33

Explanation:

A portfolio which is equally as risky as market should have a beta equal to the beta of the market as beta is a measure of the riskiness. The beta of market is always equal to 1. The formula for beta of a portfolio is as follows:

Portfolio beta = wA * Beta A + wB * Beta B + ... + wN * Beta N

Where w represents the weight of each stock in the portfolio.

Let investment in stock C be x

1 = 146000/500000 * 0.91 + 134000/500000 * 1.36 + x/500000 * 1.51

1 = 0.26572  +  0.36448 + 1.51x / 500000

1 - 0.6302 = 1.51x / 500000

0.3698 * 500000 = 1.51x

1844900 / 1.51 = x

x = $122450.3311 rounded off to $122450.33

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