Using CAPM A stock has a beta of 1.13 and an expected return of 12.1 percent. A

Question

Using CAPM A stock has a beta of 1.13 and an 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 its 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

Explanation / Answer

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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