You can portfolio equally in a risk-free asset and two stocks, if one can the st

Question

You can portfolio equally in a risk-free asset and two stocks, if one can the stocks has a beta of 1.35 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?(Round your answer to 2 decimal places.(e.g.,32.165)) You own a portfolio that has $2,700 invested in Stock A and $3,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 12 percent, respectively, what is the expected return on the portfolio? (Round your answer to 2 decimal places, (e.g., 32.16)) A stock has an expected return of 13 percent, its beta is 1.45,and the expected return on the market is 10.5 percent. What must the risk-free rate be?(Round answer to 2 decimal places.)

Explanation / Answer

SOLUTION:

1. Calculation of portfolio beta.

We know that the portfolio is equally weighted with 3 components. So each have a weight of 33.33%

The risk free asset has no correlation to the market portfolio and therefor is given a beta of 0

Portfolio Beta = (weight asset 1 * Beta 1) + (weight asset 2 * Beta 2) + (weight risk free asset * Beta risk free asset)

1 = (0.3333 * B1) + (0.3333 * 1.35) + 0

1

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