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Homework answers / question archive / You want to invest $47 in a portfolio with a beta of no more than 1
You want to invest $47 in a portfolio with a beta of no more than 1.4 and an expected return of 13%. Bay Corp. has a beta of 0.9 and an expected return of 10.5%, and City Inc. has a beta of 1.8 and an expected return of 15.0%. The risk-free rate is 6%. Is it possible to create this portfolio investing in Bay Corp. and City Inc.? if so, how much will you invest in each? Select the correct choice and, if necessary, fill in the answer boxes to complete your choice. in Bay Corp. and $ in City Inc. O A. It is possible to create the portfolio by investing $ (Round to the nearest cent.) B. It is not possible to create the portfolio
Expected return of portfolio = Weight of Bay Corp * Expected return of Bay Corp + Weight of City Inc * Expected return of City Inc
Let Weight of Bay Corp = W so Weight of City Inc = 1 - W
13% = W * 10.5% + (1 - W) * 15%
13% = 10.5% * W + 15% - 15% * W
-2% = -4.5% * W
Weight of Bay Corp (W) = 44.44%
Weight of City Inc = 1 - W
Weight of City Inc = 1 - 44.44%
Weight of City Inc = 55.56%
Beta of portfolio = Weight of Bay Corp * Beta of Bay Corp + Weight of City Inc * Beta of City Inc
Beta of portfolio = 44.44% * 0.9 + 55.56% * 1.8
Beta of portfolio = 1.4
Amount invested in Bay Corp = Weight of Bay Corp * Total investement amount
Amount invested in Bay Corp = 44.44% * $47,000
Amount invested in Bay Corp = $20,886.80
Amount invested in City Inc = Weight of City Inc * Total investement amount
Amount invested in City Inc = 55.56% * $47,000
Amount invested in City Inc = $26,113.20
It is possible to create the portfolio by investing $20,886.80 in Bay Corp & $26,113.20 in City Inc
