You want to design a portfolio that has a beta of zero.Stock A has a beta of 1.69 and Stock B's beta is also greater than 1.You are willing to include both stocks as well as a risk-free security in your portfolio.If your portfolio will have a combined value of $5,000,how much should you invest in Stock B?
A)$2,630
B)$0
C)$2,959
D)$3,008
E)$1,487

Question

Quizplus · Accepted Answer

Since you want a portfolio with beta=0, you need to invest in such a way that the betas of the stocks cancel each other out. If Stock A has a beta of 1.69 and Stock B has a beta greater than 1, then you need to invest in them in opposite proportions to cancel out their betas. However, since you have a risk-free security to invest in, which has beta=0, the best option is to invest all of your money in the risk-free security, i.e., put $0 in Stock A and Stock B, and $5,000 in the risk-free security.

You Want to Design a Portfolio That Has a Beta