Stock J has a beta of 1.23 and an expected return of 13.31 percent, while Stock

Question

Stock J has a beta of 1.23 and an expected return of 13.31 percent, while Stock K has a beta of 0.78 and an expected return of 10.25 percent. You want a portfolio with the same risk as the market. Requirement 1: What is the portfolio weight of each stock? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) Stock J = Stock K = Requirement 2: What is the expected return of your portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Expected return of the portfolio =_____ %

Explanation / Answer

Details stock J Stock K Beta of stock                        1.23                 0.78 Expected return from stock   13.31% 10.25% Assume weight of Stock J =w, so that of stock K=(1-w) Required portfolio beta =1=Market beta So, w*1.23+(1-w)*0.78=1 1.23*w+0.78-0.78*w=1 0.45w=0.220 w=48.89% so Portfolio weight of stock J =48.89% Portfolio weight of stock K=51.11% So expected return from portfolio = 0.4889*0.1331+0.5111*0.1025 = 11.75% So Expected Return from portfolio =11.75%

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