A stock has a beta of 1.29 and an expected return of 12.7 percent. A risk-free a

Question

A stock has a beta of 1.29 and an expected return of 12.7 percent. A risk-free asset currently earns 4.25 percent. Required: 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 0.89, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.16.16).) Weight of the stock Weight of the risk-free asset

Explanation / Answer

Expected return:

= 12.7%×0.5+4.25%×0.5

= 8.47%

Weight of stock+Weight of risk free = 1

Weight Stock:

= 0.89÷1.29

= 0.6899

Weight of risk free:

= 1-0.6899

= 0.3101

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