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30 December, 12:53

You would like to combine a risky stock with a beta of 1.87 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 the risky stock

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  1. 30 December, 13:21
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    46.5%

    Explanation:

    The treasury bills have zero beta as they have no systematic risk. Beta is used in the Capital asset pricing Model to demonstrate a relationship between systematic risk and rate of return.

    Expected Return = Rf + Beta * Rp

    The percentage that should be invested in the risky portfolio will be,

    1 - 1 / Beta

    1 - 1 / 1.87

    = 46.5%
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