A stock has a beta of 1.2 and an expected return of 9 percent. A risk-free asset

Question

A stock has a beta of 1.2 and an expected return of 9 percent. A risk-free asset currently earns 3.3 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. Omit the "%" sign in your response.) Expected return % b. If a portfolio of the two assets has a beta of .35, 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.) Portfolio Weight xS % xrf % c. If a portfolio of the two assets has an expected return of 11.25 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Beta d. If a portfolio of the two assets has a beta of 1.44, 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.) Porfolio Weight xS % xrf %

Explanation / Answer

Srick Beta = 1.2 & Expected Return = 9%

Risk free assets Beta = 0 & Exprected Return = 3.3%

a. Expected Return = 9% * 1/2 + 3.3% * 1/2 = 6.15

b. .35 = Weight of Stock * 1.2 + Weight of RF asset * 0

Weight of Stock = .2917 or 29.17%

Weight of RF asset = 100-29 = 70.83%

c.11.25% = Weight of stock * 9% + (1 - weight of stock) * 3.3%

Weight of stock = 1.39 or 139%

Weight of RF asset = 0

d. 1.44 = Weight of Stock * 1.2 + (1- Weight of Stock) * 0

Weight of stock = 1.2 or 120%

Weight of RF asset = 0

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