A stock has a beta of 1.3 and an expected return of 10 percent. A risk-free asse

Question

A stock has a beta of 1.3 and an expected return of 10 percent. A risk-free asset currently earns 3.4 percent.

What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

If a portfolio of the two assets has a beta of .32, what are the portfolio weights? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

If a portfolio of the two assets has an expected return of 11.50 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

If a portfolio of the two assets has a beta of 1.41, what are the portfolio weights? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

a. Expected return = 0.5 * 10% + 0.5 * 3.4%

= 6.7%

b. Portfolio beta = beta of stock * Weightage of stock

=> 0.32 = 1.3 * Weightage of stock

=> Weightage of stock = 0.2462 or 24.62%

Weightage of risk free asset = 1 - 0.2462

= 0.7538 or 75.38%

c. Portfolio return = Weightage of stock * Return on stock + (1 - Weightage of stock) * Return on risk free asset

=> 11.50% = Weightage of stock * 10% + (1 - Weightage of stock) * 3.4%

=> Weightage of stock = 1.2273

Portfolio beta = beta of stock * Weightage of stock

= 1.3 * 1.2273

= 1.5955

d. Portfolio beta = beta of stock * Weightage of stock

=> 1.41 = 1.3 * Weightage of stock

=> Weightage of stock = 1.0846 or 108.46%

Weightage of risk free asset = 1 - 1.0846

= -0.0846 or -8.46%

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