Stock J has a beta of 1.21 and an expected return of 13.21 percent, while Stock

Question

Stock J has a beta of 1.21 and an expected return of 13.21 percent, while Stock K has a beta of 0.76 and an expected return of 10.15 percent. You want a portfolio with the same risk as the market.

What is the expected return of your portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Stock J has a beta of 1.21 and an expected return of 13.21 percent, while Stock K has a beta of 0.76 and an expected return of 10.15 percent. You want a portfolio with the same risk as the market.

Explanation / Answer

Stock J has a beta of 1.21 and an expected return of 13.21 percent, while Stock K has a beta of 0.76 and an expected return of 10.15 percent. You want a portfolio with the same risk as the market.

Beta of Portfolio = Beta of Market (given)

Beta of Portfolio = 1

Beta of Portfolio = Beta of Stock J * Weight of Stock J + Beta of Stock K * (1-Weight of Stock J)

1 = 1.21*Weight of Stock J + 0.76*(1-Weight of Stock J)

1 = 1.21*Weight of Stock J + 0.76 - 0.76Weight of Stock J

1-0.76 = 0.45 Weight of Stock J

Weight of Stock J = 0.24/0.45 = 0.5333

Weight of Stock K = 1- 0.5333 = 0.4667

What is the expected return of your portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Expected return of your portfolio = Expected return of Stock J * Weight of Stock J + Expected return of Stock K * Weight of Stock K

Expected return of your portfolio = 13.21*0.5333 + 10.15*0.4667

Expected return of your portfolio = 11.78

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