Your investment portfolio consists of $15,000 invested in only one stock—Amazon. Suppose the risk-free rate is 5%, Amazon stock has an expected return of 12% and a volatility of 40%, and the market portfolio has an expected return of 10% and a volatility of 18%. Under the CAPM assumptions, a. What alternative investment has the lowest possible volatility while having the same expected return as Amazon? What is the volatility of this investment? To create an alternative investment that has the lowest possible volatility while having the same expected return as Amazon, we use the following strategy: Sell:________ worth of Amazon stock. (Round to the nearest dollar.) Borrow: ______ at the risk-free rate. (Round to the nearest dollar.) Buy: _________ worth of the market portfolio. (Round to the nearestdollar.) Buy: _________ worth of the risk-free investment. (Round to the nearestdollar.) Additional Info: I know the processes of deriving the Beta and volatility. However, I want to know how to compute the calculations necessary to solve the table above.
Your investment portfolio consists of $15,000 invested in only one stock—Amazon. Suppose the risk-free rate is 5%, Amazon stock has an expected return of 12% and a volatility of 40%, and the market portfolio has an expected return of 10% and a volatility of 18%. Under the
a. What alternative investment has the lowest possible volatility while having the same expected return as Amazon? What is the volatility of this investment?
To create an alternative investment that has the lowest possible volatility while having the same expected return as Amazon, we use the following strategy:
Sell:________ worth of Amazon stock. (Round to the nearest dollar.)
Borrow: ______ at the risk-free rate. (Round to the nearest dollar.)
Buy: _________ worth of the market portfolio. (Round to the nearestdollar.)
Buy: _________ worth of the risk-free investment. (Round to the nearestdollar.)
Additional Info: I know the processes of deriving the Beta and volatility. However, I want to know how to compute the calculations necessary to solve the table above.
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