You own a portfolio equally invested in a risk-free asset and two stocks. If one

Question

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.35 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?(Round your answer to 2 decimal places.(e.g.,32.16)) You own a portfolio that has $2,700 invested in Stock A and $3,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 12 percent, respectively, what is the expected return on the portfolio?(Round your answer to 2 decimal places.(e.g.,32.16)) A stock has an expected return of 13 percent, its beta is 1.45, and the expected return on the market is 10.5 percent. What must the risk-free rate be? (Round your answer to 2 decimal places.(e.g.,32.16))

Explanation / Answer

1) Since one stock has beta of1.35 other stock should have beta of .65 2) Particulars Investment Weight Expected return Weighted return(Weight*Return) Stock A                                                      2,700.00                             0.4219 9% 3.80% Stock B                                                      3,700.00                             0.5781 12% 6.94%                                                      6,400.00                                  1.00 10.73% 3) Expected retrn, ke 13% Beta, B                                                               1.45 Return on Market,Rm 10.50% Ke= Rf +B(Rm-Rf) 13% = Rf+1.45(10.5%-Rf) 13% = Rf + 15.225% - 1.45Rf .45Rf = 2.225% Rf = 4.944%

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