Question

You would like to combine a risky stock with a beta of 1.68 with a treasury bill in a way that the risk level of the portfolio is equivalent to the risk level of the market. What weight of the portfolio should be invested in the Treasury Bill?

Answer 1

0.60 or 60%

Step-by-step explanation:

Calculation of weight of the portfolio

Assume that the weight is x

x*[Beta of stock) + (1+x)*(Beta of Tbills) = 1

x * (1.68) + (1-x)*(0) = 1

1.68x + (1-x)*0 = 1

1.68x + 0 = 1

x = [1/1.68]

x = 0.5952

x = 0.60 or 60%

So, the weight of the portfolio that should be invested in the Treasury Bill is 0.60 or 60%.