A stock has a beta of 1.13 an as expected return of 12.1 percent. A risk-free as

ID: 2633503 • Letter: A

Question

A stock has a beta of 1.13 an as expected return of 12.1 percent. A risk-free asset currently earns 5 percent.

a. what is the expected return on a portfolio that is equally invested in the two assets?

b.If a portfolio of the two assets has a beta of .50, what are the portfolio weights?

c.If a portfolio of the two assets has an expected return of 10 percent, what is it's beta?

d. If a portfolio of the two assets has a beta of 2.26 what are the portfolio weights?

How do you interpret the weights for the two assets in this case? explain

a) exp return = (12.1+5)/2 = 8.55%

b) .5 = 1.13x+0

x = .5/1.13 = .4424

44.24% in stock and 55.76% in risk free

c) 10 = 12.1x+5(1-x)

5 = 7.1x

x =stock share = 5/7.1 = 70.42253%

beta portfolio = .7042253*1.13 = .7957

d) 2.26 = 1.13*x

x = 2

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