Suppose that there are only three stocks in the market: Jazz, Inc., Classical, Inc., and Rock, Inc. Their outstanding shares and prices are shown in the table below. The risk-free rate is 2%. Assume that the market is efficient.
|
Security
|
Outstanding Shares (03.)
|
Price
|
Cap = O.S. * Price
|
Weight
|
|
Jazz Inc.
|
10,000
|
$6.00
|
$60,000
|
3/20
|
|
Classical Inc.
|
30,000
|
$4.00
|
$120,000
|
3/10
|
|
Rock, Inc.
|
40,000
|
$5.50
|
$220,000
|
11/20
|
Suppose that the expected returns of Jazz, Classical, and Rock are 10%, 6%, and 12%, respectively.
An investor who has $10,000 wants to achieve an expected return of 40%.How much money should she invest in each stock and the risk-free security?