Question

You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.7 percent. Stock X has an expected return of 11.4 percent and a beta of 1.25, and Stock Y has an expected return of 8.68 percent and a beta of .85. a. How much money will you invest in Stock Y

Answer 1

Answer:

12.7% = X(11.4%) + Y(8.68%)

y = 1 - X

0.127 = 0.114X + 0.0868(1 - X)

0.127 = 0.114X + 0.0868 - 0.0868X

0.0402 = 0.0272X

X = 0.0402 / 0.0272 = 1.478

Y = 1 - 1.478 = -0.478

Y = -0.478 x $100,000 = -$47,800

Since value for Y is negative, it means that you must short sell the stock, i.e. borrow the stock, sell it, and then repurchase it later at a lower price.