Question
Your investment portfolio consists of $15,000 invested in only one stockAmazon. Suppose the risk-free rate is 5%, Amazon stock has an expected return of 12%
Your investment portfolio consists of $15,000 invested in only one stockAmazon. Suppose the risk-free rate is 5%, Amazon stock has an expected return of 12% and a volatility of 40%, and the market portfolio has an expected return of 10% and a volatility of 18%. Under the CAPM assumptions,
a. What alternative investment has the lowest possible volatility while having the same expected return as Amazon? What is the volatility of this investment?
To create an alternative investment that has the lowest possible volatility while having the same expected return as Amazon, we use the following strategy:
Sell:________ | worth of Amazon stock. (Round to the nearest dollar.) |
Borrow: ______ | at the risk-free rate. (Round to the nearest dollar.) |
Buy: _________ | worth of the market portfolio.(Round to the nearest dollar.) |
Buy: _________ | worth of the risk-free investment. (Round to the nearest dollar.) |
Additional Info: I know the process of deriving the Beta and volatility. However, I want to know how to compute the calculations necessary to solve the table above.
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