Stock J has a beta of 1.27 and an expected return of 13.51 percent, while Stock

Question

Stock J has a beta of 1.27 and an expected return of 13.51 percent, while Stock K has a beta of 0.82 and an expected return of 10.45 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 1.27 and an expected return of 13.51 percent, while Stock K has a beta of 0.82 and an expected return of 10.45 percent. You want a portfolio with the same risk as the market.

Explanation / Answer

1) 1.27 * w + 0.82 * (1 - w) = 1

w = .18 / .45

w = .40

Weight for stock J = 40%

Weight for stock K = 60%

2) Expected return = 13.51% * .40 + 10.45% * .60 = 11.67%

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