Question

You own a portfolio that has a total value of $185,000 and it is invested in Stock D with a beta of .91 and Stock E with a beta of 1.33. The beta of your portfolio is equal to the market beta. What is the dollar amount of your investment in Stock D

Answer 1

$145,357.14

Step-by-step explanation:

The computation of the dollar amount of your investment in Stock D is shown below:

Let us assume the investment in D be $x

So,

The investment in E is ($185,000 - x)

As we know that

Portfolio beta= Respective beta × Respective investment weight

1 = (x ÷ 185,000 × 0.91 ) +(185,000 - x) ÷ 185,000 × 1.33

Here

Beta of market = 1

And, the Beta of risk-free assets=0

(1 × 185000) = 0.91x + 246050 - 1.33x

185,000 = 0.91x + 246050 - 1.33x

x = (246050 - 185,000) ÷ (1.33 - 0.91)

= $145,357.14