Have you ever daydreamed about receiving a $1 million check? How would you invest it?
Solution Preview
We have two good options:
1) Treasury Bills, which offer an absolutely safe return, and
2) The stock market.
Your investment policy is going to depend on your tolerance for risk.
Suppose that you invest 80% of your money in the stock market and invest the remaining 20% in government T-Bills. Then ...
Solution Summary
Have you ever daydreamed about receiving a $1 million check? How would you invest it?
Your investment policy is going to depend on your tolerance for risk.
Suppose that you invest 80% of your money in the stock market and invest the remaining 20% in government T-Bills. Then the beta of your overall portfolio will be a mixture of the beta of the market and the beta of the T-Bills.
Beta of Portfolio = (proportion in market X beta of market) + (proportion in T-Bills X beta of T-Bills)
B = (.8 X B-Market) + (.2 X B-TBills)
B = (.8 X 1) + (.2 X 0) = .8
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