Question

Analyzing a Portfolio - You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below:

Asset Investment Beta
Stock A $135,000 .80
Stock B $145,000 1.25
Stock C 1.40
Risk-free asset

a.How much will you invest in Stock C?

Answer 1

To create a portfolio equally as risky as the market, you need to calculate the investment amount for each stock based on their betas. The amount to invest in Stock C would be $200,000.

Step-by-step explanation:

To create a portfolio equally as risky as the market, you need to invest a certain amount in each stock based on their betas. Beta measures an asset's sensitivity to market movements. In this case, Stock A has a beta of 0.80, Stock B has a beta of 1.25, and Stock C has a beta of 1.40. To calculate the investment in Stock C, we can use the equation:

Investment in Stock C = Total investment amount * (Stock C beta / Sum of all stock betas)

Plugging in the values, Investment in Stock C = $500,000 * (1.40 / (0.80 + 1.25 + 1.40)).

So, the amount you would invest in Stock C is $200,000.