A stock has a beta of 1.0 and an expected return of 14 percent. A risk-free asse

Question

A stock has a beta of 1.0 and an expected return of 14 percent. A risk-free asset currently earns 4.5 percent. What is the expected return on a portfolio that is usually 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 our response.) If a portfolio of the two assets has a beta of.85, 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.) If a portfolio of the two assets has an expected return of 9.25 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.) If a portfolio of the two assets has a beta of 1.36, 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 "%

Explanation / Answer

a) Expected Return = 14%*.50 + 4.5%*.5 Expected Return = 7% + 2.25% Expected Return = 9.25% b) Weight of Stock be x Weight of Rf is 1-x .85 = 1*x + 0*(1-x) x= .85 Stock Weight =.85 Risk free asset Weight= 1-x= 1-.85 = .15 c) Weight of Stock be x Weight of Rf is 1-x 9.25% = 14%*x +4.5%(1-x) 4.75% =9.5%x X = .50 Risk free Asset = 1-.5 = .5 Beta = .50*1 + .5*0 = .50 d) Weight of Stock be x Weight of Rf is 1-x 1.36 = 1*x + 0*(1-x) x= 1.36 Stock Weight =1.36 Risk free asset Weight= 1-x= 1-1.36 = -.36

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