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You have $200,000 to invest in a portfolio containing Stock X and Stock Y
You have $200,000 to invest in a portfolio containing Stock X and Stock Y. can you make portfolio that has an expected return of 11.85 percent. Stock X has an expected return of 10.39 percent and a beta of 1.26 and Stock Y has an expected return of 7.01 percent and a beta of .74.
How much money will you invest in Stock Y? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the beta of your portfolio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Expert Solution
Computation of the investment in stock Y:-
Weight of stock X = A
Weight of stock Y = (1 - A)
As per question,
Expected return on portfolio = (Return on stock X * Weight of stock X) + (Return on stock Y * Weight of stock Y)
11.85% = 10.39% * A + 7.01% * (1 - A)
11.85% = (10.39% * A) + 7.01% - (7.01% * A)
11.85% - 7.01% = (10.39% * A) - (7.01% * A)
4.84% = 3.38% * A
A = 4.84% / 3.38%
= 1.43
Weight of stock Y = (1 - A)
= 1 - 1.43
= -0.43
Investment in stock X = $200,000 * A
= $200,000 * 1.43
= $286,390.53
Investment in stock Y = $200,000 * (1 - A)
= $200,000 * (1 - 1.45)
= -$86,390.53
Computation of the beta of portfolio:-
Beta of portfolio = (Beta of stock X * Weight of stock X) + (Beta of stock Y * Weight of stock Y)
= (1.26 * 1.43) + (0.74 * -0.43)
= 1.80 - 0.32
= 1.48
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