A stock has a beta of 1.50 and an expected return of 14 percent. A risk-free ass

Question

A stock has a beta of 1.50 and an expected return of 14 percent. A risk-free asset currently earns 2 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 .84, what are the portfolio weights?

c. If a portfolio of the two assets has an expected return of 9 percent, what is its beta?

d. If a portfolio of the two assets has a beta of 3.00, what are the portfolio weights?

***(Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a whole number.)***

Explanation / Answer

a E(r) of the portfolio = (0.50)0.02 + (0.50)0.14 = 8% b 0.84 = weight of stock*1.50 weight of stock =.84/1.50 = 56% weight of risk-free asset =1-.56 =44% c if the two asset portfolio has an E(r) of 9%, then the weights must be: 0.09 = weight stock(0.14) + (1 - weight of stock)*(0.02) =.09 =.14x-+.02(1-X) .09-.02 =.14x+.02x X =58.33% weight of risk-free asset =1-58.33 =41.67% beta of portfolio = 58.33% * 1.50 =.87495 d 3= 1.14(weight stock "X") + 0 (1- weight of stock) 3 =1.14X weight stock=263% weight of risk-free asset =-163%

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