A stock has a beta of 1.31 and an expected return of 12.9 percent. A risk-free a
ID: 2733628 • Letter: A
Question
A stock has a beta of 1.31 and an expected return of 12.9 percent. A risk-free asset currently earns 4.35 percent.
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 percentage rounded to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 0.91, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
If a portfolio of the two assets has an expected return of 12.1 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 2.51, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
A stock has a beta of 1.31 and an expected return of 12.9 percent. A risk-free asset currently earns 4.35 percent.
Explanation / Answer
Answer:(a) ER(p)=Ws*ERs*Wf*ERf
= 0.5(12.9) + 0.5(4.35)= 8.625%
Answer:(b) As the beta of the risk free asset is zero whereas the beta of the other being 1.31, the portfolio weights of the other asset can be determined as 0.91 divided by 1.31 which is 69%. Hence the weights are:
Weight of the risk-free asset = 31%
Weight of the stock = 69%
Answer:(c) E(RP) = 0.121 = 0.129wS+ 0.0435(1 wS)
0.121= 0.129wS+ 0.0435 0.0435wS
0.0775= 0.0855wS
wS= 0.9064
So, the of the portfolio will be:
P= 0.9064(1.31) + (1 0.9064)(0) =1.187 or 1.19
Answer:(d) As the beta of the risk free asset is zero whereas the beta of the other being 1.31, the portfolio weights of the other asset can be determined as 2.51 divided by 1.31 which is 191.6030%. Hence the weights are:
Weight of the risk-free asset = -91.603%
Weight of the stock = 191.6030%
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