Answer: BP = BD(WD) + BE(WE)
1 = 0.86(1-WE) + 1.39WE
1 = 0.86-0.86WE + 1.39WE
1 = 0.86 + 0.53WE
-0.53WE = -0.14
0.53WE = 0.14
WE = 0.14/0.53
WE = 0.2641509434
WD = 1 - WE
WD = 1 - 0.2641509434
WD = 0.7358490566
The dollar amount of investment in stock D = 0.7358490566 x $215,000
= $158,207.54
Explanation: The beta of the portfolio is 1, which corresponds to the beta of the market. The beta of the portfolio equals beta of each stock multiplied by the percentage of fund invested in each stock(weight). The weight of stock D is equal to 1 - weight of stock E. Therefore, we need to make weight of stock E the subject of the formula by solving the problem mathematically and collecting the like terms. The weight of stock E is 0.2641509434. The weight of stock E will be subtracted from 1 so as to obtain the weight of stock D, which is 0.7358490566. The dollar amount of stock D equal to $215,000 multiplied by 0.7358490566, which is $158,207.54.
