Question

The beta of General Mills stock is 0.5 and the beta of Apple stock is 1.1. A portfolio is formed with these two stocks. The weights are chosen so as to make the beta of the portfolio equal to 0.62. What is the proportion of funds invested in General Mills stock

Answer 1

Answer: Using the formula for portfolio beta, we have:

Portfolio Beta = Weight of General Mills * Beta of General Mills + Weight of Apple * Beta of Apple

Substituting the given values, we have:

0.62 = Weight of General Mills * 0.5 + (1 - Weight of General Mills) * 1.1

Solving for Weight of General Mills, we get:

Weight of General Mills = (1.1 - 0.62) / (1.1 - 0.5)

Weight of General Mills = 0.48 or 48%

Therefore, the proportion of funds invested in General Mills stock is 48%.

Step-by-step explanation: