You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and stock B has an expected return of 17.8 percent. You want to own $20,000 of stockB. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?
A) $11,921
B) $13,509
C) $15,265
D) $17,314
E) $18,775

Question

Quizplus · Accepted Answer

To find the amount to invest in the risk-free security, calculate the expected return of the portfolio and set it equal to the market return. Let x be the amount invested in Stock A, and y be the amount in the risk-free security. The portfolio equation is: 0.142x + 0.178(20,000) + 0.048y = 0.131(65,000). Solving for y gives $15,265.

You Want to Create a $65,000 Portfolio Comprised of Two