Asset W has an expected return of 11 percent and a beta of 1.50. If the risk-fre

Question

Asset W has an expected return of 11 percent and a beta of 1.50. If the risk-free rate is 3.5 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Asset W has an expected return of 11 percent and a beta of 1.50. If the risk-free rate is 3.5 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your expected return answers to 2 decimal places. (e.g., 32.16) and beta answers to 3 decimal places. (e.g., 32.161))

Explanation / Answer

a)

The slope of the SML is equal to the market risk premium

Market risk premium = (Expected Return of 100% Market portfolio - Risk free rate )/Beta of Portfolio

Market risk premium = (11%-3.5%)/1.5

Market risk premium = 5%

Answer

Slope of the line = 5%

Percentage of Portfolioin Asset W Portfolio Expected Return Portfolio Beta [a] [a* 11% + (1-a)*3.5%] [a* 1.5 + (1-a)*0] 0% 3.50% 0 25% 5.38%                   0.375 50% 7.25%                   0.750 75% 9.13%                   1.125 100% 11.00%                   1.500 125% 12.88%                   1.875 150% 14.75%                   2.250

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