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Estrella Hougland is looking to invest in a portfolio of 2 stocks, T (AT&T Inc
Estrella Hougland is looking to invest in a portfolio of 2 stocks, T (AT&T Inc.) in the Integrated Telecommunication Services sector and IR (Ingersoll-Rand PLC) in the Industrial Machinery sector. They have betas of 2.72 and -2.57 respectively, given that the market is expected to return 5.00% and the yield on a 10-year treasury is 1.90%—what are the appropriate weights on the portfolio to form a zero-beta portfolio? (place your answers in the boxes) (hint: the fact that there are 2 assets is key)
Expert Solution
Let w be invested in AT&T,
Target Beta = 0,
So,
0 = 2.72(w) - 2.57(1 - w)
0 = 2.72w - 2.57 + 2.57w
w = 48.58%
So,
Weight in AT&T = 48.58%
Weight in Ingersoll-Rand PLC = 51.42%
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