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You have $100,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset....

Question:

You have $100,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 13 percent and that has only 70 percent of the risk of the overall market. If X has an expected return of 31 percent and a beta of 1.8, Y has an expected return of 20 percent and a beta of 1.3, and the risk-free rate is 7 percent, how much money will you invest in Stock Y?

Amount $ ????

Portfolio Beta:

Portfolio Beta is given as the sum of individual weights multiplied by the individual betas of the stocks in the portfolio. Porftolio beta of a market is always 1 and that of the risk free asset is zero.

Answer and Explanation:

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Amount invested in stock Y is $76,900

  • Let the weight of stock X is wx
  • Weight of stock Y is wy
  • Weight of risk free asset = 1 - wx - wy

  • Beta of stock...

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Portfolio Weight, Return & Variance: Definition & Examples

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Chapter 12 / Lesson 1
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A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.


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