A stock has a beta of 1.34 and an expected return of 13.2 percent. A risk-free a
ID: 2629566 • Letter: A
Question
A stock has a beta of 1.34 and an expected return of 13.2 percent. A risk-free asset currently earns 4.5 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 percentage rounded to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 0.94, 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 12.4 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 2.54, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
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 percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Expected return on stock E(R S) 13.20% Beta on stock 1.34 Expected return on risk free asset E(RF) 4.50% Beta on risk free asset (Always 0) 0 (a) WEIGHT EQUAL Expected return on Portfolio E(R P) =13.20*0.5+4.50*0.5 Expected return on Portfolio E(R P) 8.85% (b) Portfolio weight Let stock weight be 'x' then risk free asset weight 1-x 0.94 =1.34*x +(1-x) *0 0.94=1.34 x x=0.7015 1-x =0.2985 Weight of stock = 0.7015 Weight of risk free asset = 0.2985 ( C) Beta First find out weight Let stock weight be 'x' then risk free asset weight 1-x 12.4%=13.2*x+4.5(1-x) 12.4%=13.2x+4.5-4.5x 12.4=8.7x+4.5 7.9=8.7X x = 0.9405 1-x =0.0595 Weight of stock = 0.9405 Weight of risk free asset = 0.0595 Beta =1.34*0.9405+0*0.0595 Beta =1.26 (d ) Portfolio weights Portfolio beta =2.54 Let stock weight be 'x' then risk free asset weight 1-x 2.54=1.34*x+0*(1-x) x=1.89555 1-x = -0.8955 Weight of stock = 1.8955 Weight of risk free asset = -0.8955 i.e risk free borrowing rather than investing
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.