Question:
Consider the following information:
|
|
Stock A
|
Stock B
|
|
Beta
|
0.8
|
1.4
|
|
Share price, $
|
20
|
40
|
|
Standard deviation
|
25%
|
50%
|
|
Correlation between A and B
|
0.25
|
Treasury bills currently yield 2%, and the market risk premium is 6%.
(a) Compute the expected return and standard deviation of a portfolio of 100 shares of Stock A and 100 shares of Stock B.
(b) Ajay has $10,000 to invest. He plans to invest $4,000 in Stock B. He will allocate the rest of his money to Treasury bills and Stock A. His goal is to construct a portfolio with a beta of 1.0. Compute the investment amounts (in dollars) in Treasury bills and Stock A required to achieve the goal.