A stock has a beta of 1.45 and an expected return of 13 percent. A risk-free ass

Question

A stock has a beta of 1.45 and an expected return of 13 percent. A risk-free asset currently earns 4 percent. a. 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 percent rounded to 2 decimal places, e.g., 32.16.) Expected return 8.5 % b. If a portfolio of the two assets has a beta of .87, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.) Weight of stock Risk-free weight 0.60 0.40 c. If a portfolio of the two assets has an expected return of 9 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) Beta 0.798 d. If a portfolio of the two assets has a beta of 2.90, what are the portfolio weights? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a whole number.) Weight of stock Risk-free weight

Explanation / Answer

let the weight of stock be "X" and weight of risk free asset = 1-x

d)Beta of portfolio = [beta of stock * weight of stock ]+ [beta of risk free asset * weight of RFA]

    2.9 = [1.45* X] +[0* (1-X)]

   2.9 = 1.45X + 0

   X = 2.9/1.45

           = 2

weight of stock = 2 or 200%

weight of risk free asset = 1-2 = -1 or -100%

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