Stock J has a beta of 1.3 and an expected return of 13.66 percent, while Stock K

Question

Stock J has a beta of 1.3 and an expected return of 13.66 percent, while Stock K has a beta of 0.85 and an expected return of 10.6 percent. You want a portfolio with the same risk as the market.

What is the expected return of your portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Stock J has a beta of 1.3 and an expected return of 13.66 percent, while Stock K has a beta of 0.85 and an expected return of 10.6 percent. You want a portfolio with the same risk as the market.

Explanation / Answer

Market portfolio should have beta of 1. So weighted average of weights of stocks in portfolio should be 1

1.3x + .85(1-x) = 1
.45x = .15
x = .15/.45 = 33.3333% in J
1-x = 67.6667% in K

Expected return of portfolio = 33.3333% * 13.66% + 66.6667% * 10.60% = 11.62%

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