A stock has a beta of 1.60 and an expected return of 10 percent. A risk-free ass

Question

A stock has a beta of 1.60 and an expected return of 10 percent. A risk-free asset currently earns 2.4 percent.

If a portfolio of the two assets has a beta of 3.20, what are the portfolio weights? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations.)

Weight of stock?

Risk Free Weight?

If a portfolio of the two assets has a beta of 3.20, what are the portfolio weights? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations.)

Explanation / Answer

Let weight of stock=x

Hence weight of risk free asset=(1-x)

Portfolio beta=Respective betas*Respective weights

3.2=(x*1.6)+(1-x)*0[Beta of risk free asset=0]

3.2=1.6x

Hence x=(3.2/1.6)

=200%=weight of stock

weight of risk free asset=(100-200)=(100%)(Negative).

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