Stock J has a beta of 1.2 and an expected return of 13.16 percent, while Stock K

Question

Stock J has a beta of 1.2 and an expected return of 13.16 percent, while Stock K has a beta of 0.75 and an expected return of 10.1 percent. You want a portfolio with the same risk as the market.

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).)

Stock J has a beta of 1.2 and an expected return of 13.16 percent, while Stock K has a beta of 0.75 and an expected return of 10.1 percent. You want a portfolio with the same risk as the market.

Explanation / Answer

The beta for the market portfolio is 1.0 by definition. You need a weighted average of J,K that has a beta of 1.0 Let weight of Stock J be x and weight of Stock K be 1-x 1.2x + .75(1-x) = 1 1.2x + .75 - .75x = 1 .45x = .25 x=.56 Stock J weight =.56 Stock K weight =.44(1-.56) Stock Weight(a) Expected return(b) Weighted return (a*b) Stock J                  0.56 13.16% 7.37% Stock K                  0.44 10.10% 4.44%                  1.00 11.81% Expected return of portfolio is 11.81%

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