You would like to combine a risky stock with a beta of 1.6 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in the risky asset?
A)16.00%
B)62.50%
C)52.55%
D)47.45%
E)37.5%

Question

Quizplus · Accepted Answer

The beta of a risk-free asset,such as U.S.Treasury bills,is zero.The beta of the market is 1.0.Beta_Portfolio = 1.0 = [x × 1.6] + [(1 - x)× 0]x = .6250,or 62.50%

You Would Like to Combine a Risky Stock with a Beta