Asset W has an expected return of 10.4 percent and a beta of 1.25. If the risk-f

ID: 2715053 • Letter: A

Question

Asset W has an expected return of 10.4 percent and a beta of 1.25. If the risk-free rate is 3.2 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Round your expected return answers to 2 decimal places. (e.g., 32.16) and beta answers to 3 decimal places. (e.g., 32.161))

If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Round your answer to 2 decimal places. (e.g., 32.1616))

Percentage of Portfolio
in Asset W Portfolio
Expected Return Portfolio
Beta 0 % % 25 % 50 % 75 % 100 % 125 % 150 %

Explanation / Answer

Here we will use the weighted average method to calculate the portfolio expected return and beta

Portfolio expected return =Percentage of each asset class * Expected return of each asset class

Portfolio beta =Percenatge of each asset class * Beta of each asset class

Portfolio =Asset W + Risk free asset

% of W in portfolio

Portfolio expected return

Portfolio beta

3.2

2.855

0.3125

6.8

0.625

8.6

0.9375

100

10.4

1.25

Portfolio expected return and beta have direct relationship .The more the risk the more the return ..the more the beta the more the expected return.