A stock has a beta of 1.30 and an expected return of 10 percent. A risk-free ass

Question

A stock has a beta of 1.30 and an expected return of 10 percent. A risk-free asset currently earns 3.4 percent.

  

What is the expected return on a portfolio that is equally invested in the two assets? (Round your answer to 2 decimal places. (e.g., 32.16))

  

If a portfolio of the two assets has a beta of 1.04, what are the portfolio weights? (Round your answer to 4 decimal places. (e.g., 32.1616))

  

If a portfolio of the two assets has an expected return of 8 percent, what is its beta? (Do not round intermediate calculations and round your answer to 3 decimal places. (e.g., 32.161))

  

If a portfolio of the two assets has a beta of 2.60, what are the portfolio weights? (Negative amount should be indicated by a minus sign.)

A stock has a beta of 1.30 and an expected return of 10 percent. A risk-free asset currently earns 3.4 percent.

Explanation / Answer

a. a. a. a. a. STOCKS RETURNS WEIGHTS Portfolio Return A Stock 10 0.5 5 Risk free 3.4 0.5 1.7 Portfolio Return 6.7 b. STOCKS Beta WEIGHTS PortfolioBeta A Stock 1.3 X 1.3X Risk Free 0 1-X 0 PortfolioBeta 1.04 X = 1.04/1.3 0.8 STOCKS WEIGHTS A Stock 0.8 Risk Free 0.2 c. STOCKS RETURNS WEIGHTS Portfolio Return A Stock 10 X 10X Risk free 3.4 1-X 3.4(1-X) Portfolio Return 8 10X+3.4-3.4X = 8 6.6X = 4.6 X = 4.6/6.6 = 0.697 STOCKS Beta WEIGHTS Portfolio Beta A Stock 1.3 0.697 0.9061 Risk free 0 0.303 0 Portfolio Beta 0.9061 d. STOCKS Beta WEIGHTS Portfolio Beta A Stock 1.3 X 1.3X Risk free 0 1-X 0 Portfolio Beta 2.6 X = 2.6/1.3 = 200% STOCKS WEIGHTS A Stock 200 Risk free -100

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