Stock J has a beta of 1.2 and an expected return of 13.16 percent, while Stock K

Question

Stock J has a beta of 1.2 and an expected return of 13.16 percent, while Stock K has a beta of 0.75 and an expected return of 10.1 percent. You want a portfolio with the same risk as the market. What is the portfolio weight of each stock? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) 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).)

Explanation / Answer

The portfolio f market has beta of 1

hence weighted average beta of two stock should be

1.2*x + 0.75* (1-x) =1

0.45x =0.25

=0.25/.45 =55.55%

55.55% of stock J

And 1-x = 45.45% os stock K

Expected return = 55.55%*13.16% + 45.45%*10.1% =11.81%

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