Suppose that the S&P 500, with a beta of 1, has an expected return of 25% and T-

ID: 2654939 • Letter: S

Question

Suppose that the S&P 500, with a beta of 1, has an expected return of 25% and T-bills provide a risk-free return of 5%.

A. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of the following

- 0

- 0.25

- 0.5 -

- 0.75

- 1

Find values for the expected return AND beta of the following numbers listed above.

Suppose that the S&P 500, with a beta of 1, has an expected return of 25% and T-bills provide a risk-free return of 5%.

A. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of the following

- 0

- 0.25

- 0.5 -

- 0.75

- 1

Find values for the expected return AND beta of the following numbers listed above.

1. S&P 500 = 0
Expected Return = 5%
Beta = 0

2. S&P 500 = 0.25
Expected Return = (25 x 0.25) + (5 x 0.75) = 10%
Beta = (1 x 0.25) = 0.25

3. S&P 500 = 0.25
Expected Return = (25 x 0.5) + (5 x 0.5) = 15%
Beta = (1 x 0.5) = 0.5

4. S&P 500 = 0.75
Expected Return = (25 x 0.75) + (5 x 0.25) = 20%
Beta = (1 x 0.75) = 0.75

5. S&P 500 = 1
Expected Return = 25%
Beta = 1

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