Your friend,Dobson,manages the Formula Growth mutual fund.Dobson expects to earn 11% on his portfolio with a beta of 1.2.You only invest in shares of General Electric and T-Bills.You like GE because it was started in 1890 by Thomas Edison,the great American inventor,and it has a diversified portfolio of products including jet engines and MRI diagnostic imaging machines.The expected return of GE is 13% and its beta is 1.40.The expected return on T-Bills is 2%.If you construct your portfolio so that its risk is equal to the risk of Formula Growth,then what portfolio weight do you need on the shares of GE?
A) 0.85
B) 0.86
C) 0.87
D) 0.88
E) 0.89

Question

Quizplus · Accepted Answer

Since we want the portfolio to have a beta of 1.2, we equate this beta to the weighted average of the betas of our two securities, GE shares and T-Bills. Let w be the weight of GE. β_p = w₁β₁ + . . . + w_nβ_n 1.2 = w(1.4) + (1 - w)0 1.2 = 1.4w w = 11ea7fdb_fc0a_73c9_a768_c1ff661ed7d6_TB2902_11 = 0.857 or 0.86

Your Friend,Dobson,manages the Formula Growth Mutual Fund