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No results > Options Take a Test - Jared Myers Microsoft Edge Jared Myers 11/3/17 3:20 PM Quiz: Bonus Quiz 3FA Time Remaining: 00:32:47 Submilt Quiz This Question: 1 pt This Quiz: 12 pts possible A trend says that she expects to earn 13 5 % on her portfolio with a beta o 2.25 You have a two asset portfolio including stock X and a risk free security The expected rotum o stock X s 1 0s and the beta s 1 75 The expected return on the risk tree security is 3 50% if you construct your portfolio so that its beta s equal to the beta on your friend's portfolio, then what is the expected return of your poitfolio? The expected return of your portfolio % (Round to two decimal places) pe here to search

Explanation / Answer

Stock X:
Expected Return = 11.50%
beta = 1.75

Risk-free security:
Expected Return = 3.50%
beta = 0

Let x be the weight of Stock X in Portfolio and (1-x) be the weight of Risk-free security

Desired Portfolio beta = 2.25
Weight of Stock X*Beta of Stock X + Weight of risk-free security*Beta of risk-free security = 2.25
x * 1.75 + (1-x) * 0 = 2.25
x * 1.75 = 2.25
x = 1.2857

Weight of Stock X = 1.2857
Weight of Risk-free security = 1 - 1.2857
Weight of Risk-free security = -0.2857

Portfolio Expected Return = Weight of Stock X*Expected Return of Stock X + Weight of risk-free security* Expected Return of risk-free security
Portfolio Expected Return = 1.2857 * 11.50% + (-0.2857) * 3.50%
Portfolio Expected Return = 14.79% - 1.00%
Portfolio Expected Return = 13.79%

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