Question: John would like to construct a portfolio composed of two assets Y2K and GMG with a TARGET expected return of 10%. Looking forward, the unlevered
John would like to construct a portfolio composed of two assets Y2K and GMG with a TARGET expected return of 10%. Looking forward, the unlevered beta of Y2K Ltd is 0.8 and the unlevered beta of GMG Ltd is 1.8; both Y2K and GMG are financed with $200 million bonds and $300 million common shares; company tax rate is 30%; the excess market premium is 6% and the risk-free rate is 2%. What should John set the weighting of his investment in Y2K to ensure he is just able to reach his target?
Any intermediate steps should be rounded to 4 or more decimal places. Provide your FINAL answer in DECIMAL form (not percentage form!) to the nearest 3rd decimal place. For e.g., a weighting of 38.6682% or 0.386682 should be input as 0.3867.
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