Analyzing a Portfolio?

Question

You want to create a portfolio equally as risky as the market , you have $1.000000 to invest given this info :

invest $200,000 to stock A which has beta value = 0.7
invest $250,000 to stock B which has beta value = 1.10

how much you should invest to stock C with beta=1,6
and how much you would should invest to Risk free asset, what must be the beta value of risk free asset?

Answer 1

Since you want a portfolio equally as risky as the market, you'll want your portfolio to have a beta of 1.0.

This now becomes a simple algebra equation.
A 200K x 0.7
B 250K x 1.1
C $? K X 1.6
D $? K x 0.0
Total invested $1000K
Weighted beta of 1.0

You essentially have two equations left to solve your two unknowns.

I'd do the rest, but this looks like homework, so I'll let you do the rest. :-)

Hope that helps!

Answer 2

Beta is a function of volatility and correlation. Since you don't mention correlation, then there is no answer.