Calculate how much money you will invest in Stock X

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Question - You have $1 million to invest, and you must invest all your money. The following are assets you can invest: Expected Return Beta Risk-free asset 6% Not given Stock X 30% 1.8 Stock Y 20% 1.3

(a) Suppose you want to create portfolio that has an expected return of 12% by investing in the risk-free asset and Stock X. Calculate how much money you will invest in Stock X.

(b) Suppose you want to create portfolio with a systematic risk that is 70% of the risk of the overall market, by investing in the risk-free asset and Stock X. Calculate how much money you will invest in Stock X.

(c) Suppose you are told that the beta of Stock X is correct, but there is uncertainty whether the beta of Stock Y is correct. Using the CAPM framework, determine whether the beta of Stock Y is correct.

(d) You have learned in this course that if you invest only in X and Y, this 2-asset portfolio will have a higher return than the portfolio return when a risk-free asset (such as Treasury bills) is also included. This being the case, appraise why anyone would want to hold Treasury bills in their portfolio.

Reference no: EM132493181

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