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

Part A

Rp = WA x RA + WB x RB

      = 0.50 x 10%   + 0.50 x 3.4%

      = 6.70%

Part B

Bp = WA x BA + WB x BB

1.04 = WA x 1.30 + WB x 0

WA = 0.8000

WB= 1- 0.8000 = 0.2000

Part C

Rp = WA x RA + WB x RB

8%   = WAx 10%   + (1-WA)x 3.4%

0.08 = 0.10 WA + 0.034 -0.034A

WA= 0.70

WB = 1 – 0.70 = 0.30

Bp = WA x BA + WB x BB

      = 0.70 x 1.30 + 0 x 0

      = 0.91

Part D

Bp = WA x BA + WB x BB

2.60 = WA x 1.30 + WB x 0

WA = 2

WB = 1-2 = -1

A = stock

B = risk free asset

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.