Stock J has a beta of 1.37 and an expected return of 14.01 percent, while Stock

Question

Stock J has a beta of 1.37 and an expected return of 14.01 percent, while Stock K has a beta of 0.92 and an expected return of 10.95 percent. You want a portfolio with the same risk as the market.

Requirement 1:
What is the portfolio weight of each stock? (Round your answers to 4 decimal places (e.g., 32.1616).)

Stock J=?
Stock K=?

Requirement 2:
What is the expected return of your portfolio? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Expected return of the portfolio=?%

Explanation / Answer

The beta for the market portfolio is 1.0 by definition. You need a weighted average of J,K that has a beta of 1.0 1.37x + .92(1-x) = 1 .45x = .08 x = .08/.45 = 17.7778% in J 82.2222% in K For J E(r) of the portfolio = (0.5*1.37 + 0.5814.01) = 7.69 % For K E(r) of the portfolio = (0.5*0.92 + 0.5*10.95) = 5.935 %

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