Question
You want to create a portfolio equally as risky as the market by investing in three stocks and Treasury debt (risk-free asset). You have already
You want to create a portfolio equally as risky as the market by investing in three stocks and Treasury debt (risk-free asset). You have already made your investment in Stock A and Stock B. The beta on the stocks as well as your current investment in Stock A and Stock B are given below::
Asset Investment Beta
Stock A $330,000 0.85
Stock B $330,000 1.10
Stock C ? 1.50
Risk-free asset ? ?
You have $1,100,000 total to invest.
a.
What is the amount you must invest in Stock C in order to have a portfolio that is equally as risky as the market? (Do not round your intermediate calculations.) HINT: The beta on the market portfolio is always one. The beta on a portfolio is the portfolio weighted average of the betas of the portfolio's assets. You already know how much is invested in Stocks A & B, as well as how much your total investment is. That means you already know the portfolio investment for Stocks A & B. The portfolio weights of Stock C & the risk-free rate must be equal one when added to the portfolio weights of Stocks A & B: 1 = WC + Wrf + WA + WB so that 1- WA - WB = WC + Wrf
b.
Given your answer above, what is your investment in risk-free asset?
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