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

a. Expected return on 1st asset = 9%

Expected return on portfolio = 9*0.5 + 3.3*0.5 = 4.5 + 1.65 = 6.15

b. Portfolio beta = 0.35

The risk free asset has a beta of 0. Therefore, the proportion of 1st asset = 6.72*0.35/9 = 0.261 or 26.13%

Proportion of risk free asset = 73.86%

c. Expected return = 11.25%; Beta of portfolio = 9*1.2/11.25 = 0.96

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