Suppose that an investor has £1,000,000 to invest in a portfolio containing stocks A, B and a risk-free asset. The investor must invest all her money, and she is using the Capital Asset Pricing Model (CAPM) to make predictions of the expected return-beta relationship. Her objective is to create a portfolio that has an expected return of 14% and which has a beta of 0.75. If stock A has an expected return of 30% and a beta of 1.9, stock B has an expected return of 20% and a beta of 1.4, and the risk-free rate is 8%, how much money will she invest in stock A? Explain your answer and show your calculations.

Suppose that an investor has £1,000,000 to invest in a portfolio containing stocks A, B and a risk-free asset. The investor must invest all her money, and she is using the Capital Asset Pricing Model (CAPM) to make predictions of the expected return-beta relationship. Her objective is to create a portfolio that has an expected return of 14% and which has a beta of 0.75. If stock A has an expected return of 30% and a beta of 1.9, stock B has an expected return of 20% and a beta of 1.4, and the risk-free rate is 8%, how much money will she invest in stock A? Explain your answer and show your calculations.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 25P

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