value: 10.00 points Asset W has an expected retum of 13.4 percent and a beta of

Question

value: 10.00 points Asset W has an expected retum of 13.4 percent and a beta of 1.60. If the risk-free rate is 5 percent, complete the following table for portfolios of Asset W and a risk-free asset (Leave no cells blank be n to anter " wherever required. Do nat round intediae caloulations Enr returns as a percent rounded to 2 decimal plac places, o.g., 32.161.) es, o.g., 32.16, and your beta answers to 3 decimal in Asset W Beta 100 125 150 If you plot the hat results? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) onship between

Explanation / Answer

We find the Beta of Portfolio using,
Beta(Portfolio) = Ww*(1.6) + (1 - Ww)*0 = 1.6Ww

Now, we estimate the market risk premium(MRP) by using CAPM for Return of Asset W
CAPM: E(Rw) = Rf + Beta*(MRP)
.134% = 0.05 + 1.6*MRP
MRP = 0.084/1.6 = 0.0525 or 5.25%

Now, the Equation for returns of any portfolio becomes
E(Rp) = 0.05 + 0.0525Bp

Ww Beta (Bp) E(Rp) 0% 0 5.00% 25% 0.4 7.10% 50% 0.8 9.20% 75% 1.2 11.30% 100% 1.6 13.40% 125% 2 15.50% 150% 2.4 17.60%

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