Your desired portfolio beta is 1.2.Currently,your portfolio consists of $2,300 invested in Stock A with a beta of 1.43 and $3,800 in Stock B with a beta of 0.79.You have an additional $1,500 to invest and want to divide it between Stock C with a beta of 1.59 and a risk-free asset.How much should you invest in the risk-free asset?
A)−$279.25
B)$50.25
C)−$200.15
D)$182.35
E)$246.08

Question

Quizplus · Accepted Answer

Portfolio value = $2,300+ $3,800 + $1,500 = $7,600
1.2= 1.43($2,300 / $7,600)+ 0.79($3,800 / $7,600)+ 1.59(x / $7,600)+ 0[($1,500 -x)/ $7,600]
x= $1,779.25
Risk-free asset = $1,500 − $1,779.25 = −$279.25
This implies riskless borrowing of $279.25 along with an investment of $1,779.25 in Stock C.

Your Desired Portfolio Beta Is 1