Question

Asked Sep 7, 2019

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You would like to combine a highly risky stock with a beta of 2.6 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

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Step 1

Beta measures the volatility of a stock with respect to the market. The risk level or beta of the overall market is 1.

Step 2

Suppose the weight of the risky stock in the portfolio be x, then the weight of the treasury bills in the portfolio will be (1-x).

Given that the beta of the stock is 2.6.

Beta of treasury bills is zero.

Step 3

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