A stock has a beta of 1.31 and an expected return of 12.9 percent. A risk-free a
ID: 2454383 • Letter: A
Question
A stock has a beta of 1.31 and an expected return of 12.9 percent. A risk-free asset currently earns 4.35 percent.
What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 0.91, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
If a portfolio of the two assets has an expected return of 12.1 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 2.51, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
The portfoilo weights coming are Stock 192% and risk free asset -92%
stock beta 1.31 Risk free asset beta 0 Expected return of stock 12.90% Risk free rate =Rf 4.35% So Expected return=Risk free rate+Market premium*Beta Or, 0.129 =0.0435 +1.31*.Market premium Market premium =6.52%. a When portfolio weights are 50: 50 Expected return = 0.50*0.129+0.50*0.0435 = 8.625% So expected return of portfolio =8.625% b let us assume the weight of stock is w1 weight of risk free asset =(1-w1) portfolio beta =0.91 so, w1*1.31 +(1-w1)*0=0.91 or , w1 =69.46% Therefore ; Weight of stock 69.46% weight of risk free asset 30.54% c Portfoilo expected rate of return = 12.1% Market premium = 6.52% Risk free rate 4.35% Let's assume the portfolio beta is b. So , 0.121=0.0435+0.0652*b or, 0.0652b=0.0775 b=1.188 So portfolio beta =1.888 d stock beta 1.31 Risk free asset beta 0 portfolio beta 2.51 let us assume the weight of stock is w1 weight of risk free asset =(1-w1) so, w1*1.31 +(1-w1)*0 =2.51 192% or, w1=192%The portfoilo weights coming are Stock 192% and risk free asset -92%
It effectively means short 0.92 units of risk free asset and buy 1.92 units of equity .Related Questions
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