A stock has a beta of 1.45 and an expected return of 13 percent. A risk-free ass

Question

A stock has a beta of 1.45 and an expected return of 13 percent. A risk-free asset currently earns 4.0 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? (Round your answer to 2 decimal places. (e.g., 32.16)) Expected return % b. If a portfolio of the two assets has a beta of 0.87, what are the portfolio weights? (Round your answer 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 and round your answer to 3 decimal places. (e.g., 32.161)) Beta d. If a portfolio of the two assets has a beta of 2.90, what are the portfolio weights? (Negative amount should be indicated by a minus sign.) Weight of stock Risk-free weight

Explanation / Answer

(a) Expected Return = (.5*4%) + (13%*.5) = 8.5%

(b) Beta of risk free is 0

Beta of stock is 1.45

Let, the weight of stock be 'x'

So, 1.45x + 0*(1-x) = 0.87

=> x = 60%

So weight of stock is 60% and risk free asset is 40%

(c) Expected return is 9%

So weight of stock is 55.55%

Beta = 55.55% * 1.45 = 0.805

(d) Weight of stock is 200% and risk free is -100%

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