((Please someone different than NamanG answer so I can make sure the answers are

Question

((Please someone different than NamanG answer so I can make sure the answers are right))

Problem 11-23 Calculating Portfolio Weights [LO 1]

Stock J has a beta of 1.35 and an expected return of 13.91 percent, while Stock K has a beta of 0.9 and an expected return of 10.85 percent. You want a portfolio with the same risk as the market.

What is the expected return of your portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Stock J has a beta of 1.35 and an expected return of 13.91 percent, while Stock K has a beta of 0.9 and an expected return of 10.85 percent. You want a portfolio with the same risk as the market.

Explanation / Answer

The beta for the market portfolio is 1.0 by definition. You need a weighted average of J,K that has a beta of 1.0

1.35x + .9(1-x) = 1
.45x = 0.10
x = .1/.45 = 22.2222%

J = 22.2222%
K= 77.7778%

Expected return on portfolio= Weight in J*Return from J+ Weight in k* Returns from K

=22.2222%*13.91%+77.7778%*10.85%

Expected return on portfolio=11.53%

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