A stock has a beta of 1.60 and an expected return of 10 percent. A risk-free ass

Question

A stock has a beta of 1.60 and an expected return of 10 percent. A risk-free asset currently earns 2.4 percent.

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, e.g., 32.16.)

If a portfolio of the two assets has a beta of .88, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)

If a portfolio of the two assets has an expected return of 9 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

If a portfolio of the two assets has a beta of 3.20, what are the portfolio weights? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a whole number.)

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, e.g., 32.16.)

Explanation / Answer

a. expected return = 0.5*2.4% + 0.5*10% = 6.2%

b. 0.88 = 1.60 * (weight of stock) + 0* (weight of risk free)

weight of stock = 0.88 / 1.60 = 0.55 or 55%

weight of risk free = 1 - 0.55 = 0.45 or 45%

c. 9% = (10%) * (weight of stock ) + 2.4% * (weight of risk free )

use hit and trial

then weight of risk free = 0.132 or 13.2% , weight of stock = 0.868 or 86.8%

d. 3.20 = 1.60 * (weight of stock) + 0* (weight of risk free)

3.20 = 1.60 * (weight of stock)

weight of stock = 2 or 200%

Weight of risk free = 1-2 = -1 or -100%

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