A stock has a beta of .9 and an expected return of 9 percent. A risk-free asset

Question

A stock has a beta of .9 and an expected return of 9 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? (.04 + .09)/2 = 0.065 = 6.5% b. If a portfolio of the two assets has a beta of .5, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta? d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.

Explanation / Answer

Assuming second asset in portfolio is risk-free: ?a=0.92 ?b=0.00 1) ?=0.5=w

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