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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return %?

b. If a portfolio of the two assets has a beta of .84, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)

Weight of stock?

Risk-free weight?

c. If a portfolio of the two assets has an expected return of 9 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

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.)

Weight of stock?

Risk-free weight?

Please show work.

Explanation / Answer

A stock has a beta of 1.50 and an expected return of 14 percent. A risk-free asset currently earns 2 percent.

b. If a portfolio of the two assets has a beta of .84, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)

Weight of stock? .

Beta of risk-free asset is zero

Hence weight of Stock portfolio when beta of portfolio is .84 =.84/1.50 = 56%

weight of  risk-free asset = 1-.56 =44%

If a portfolio of the two assets has an expected return of 9 percent, what is its beta? (Do not round intermediate calculations

Let X =weight of stock

.14X+2*(1-X) =.09

=.07/.12 =58.33%

d. If a portfolio of the two assets has a beta of 3.00, what are the portfolio weights? (Do not round intermediate calculations.

weight of stock =3/1.50=200%

hence weight of risk free asset 1-2 = -100%

Weight Return Return*weight Stock A 50% 14% 7.00% Risk Free Asset 50% 2% 1.00% Expected return % 8.00%

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