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Homework answers / question archive / You have $100,000 to invest in a portfolio containing Xantus shares and Yak shares

You have $100,000 to invest in a portfolio containing Xantus shares and Yak shares

Finance

You have $100,000 to invest in a portfolio containing Xantus shares and Yak shares. Your goal is to create portfolio that has an expected return of 10.6%. Xantus has an expected return of 11.4% and a beta of 1.25. Yak has an expected return of 8.68% and a beta of 0.85,

a)    How much money will you invest in Yak shares? 

b)   What is the beta of your portfolio? 

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a) Computation of the investment in Yak shares:-

Portfolio return = (Weight of Xantus shares * Return of Xantus shares) + (Weight of Yak shares * Return of Yak shares)

10.6% = (WX * 11.4%) + ((1-WX) * 8.68%)

10.6% = (WX * 11.4%) + 8.68% - (WX * 8.68%)

10.6% - 8.68% = WX * 2.72%

WX = 1.92% / 2.72%

= 0.7059

Weight of Xantus shares = 0.7059

Weight of Yak shares = 1 - WX = 1 - 0.7059

= 0.2941

Investment in Xantus shares = $100,000 * 0.7059

= $70,588.24

Investment in Yak shares = $100,000 * 0.2941

= $29,411.76

 

b) Computation of the beta of portfolio:-

Portfolio beta = (Weight of Xantus shares * Beta of Xantus shares) + (Weight of Yak shares * Beta of Yak shares)

= (0.7059 * 1.25) + (0.2941 * 0.85)

= 0.88 + 0.25

= 1.13

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