Econnect FINANCE redit assignment Review ! Question 2 (Of 5) | Score This Questi

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Econnect FINANCE redit assignment Review ! Question 2 (Of 5) | Score This Question value: 10.00 points A stock has a beta of 1.70 and an expected retum of 12 percent. A risk-free asset currently eams 2.8 percent a. 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 percent rounded to 2 decimal places, e.g. 32.16.) Expected return b. If a portfolio of the two assets has a beta of 1.02, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g. 32.1616.) Weight of stock Risk-free weight c. If a portfolio of the two assets has an expected return of 10 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 3 decimal places,e.g..32.161.) Beta d. If a portfolio of the two assets has a beta of 3.40, what are the portfolio weights? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a whole number.) Weight of stock Risk-free weight Hints References eBook&Resources; Hint #1

Explanation / Answer

a. Expected return on portfolio that is equally invested in 12% asset and risk free 2.8% is average of 2 returns i.e. 12%+2.8% / 2 = 14.8%/ 2 = 7.4%

b. If the portolfio of 2 asset has a beta of 1.02, let weight of asset giving 12% return is X and risk free asset is (1-x)

We know that risk free asset has a Beta of 0

thus, 1.02 = X*1.7 which implies X = 1.02/1.7 = 60%

Thus Asset with Beta 1.7 is 60% and risk free asset is 40% in the portfolio

c. If expected return is 10%, then again lets calculate the weight of each asset.

10% = X*12% + (1-x)*2.8%

7.2% = 9.2%*X

X = 78.26%

Thus Beta of the portfolio = 1.7*78.26% + 0*(1-78.26%) = 1.33

d. If Beta is 3.4

3.4 = 1.7*X + 0*(1-x)

X = 2 and 1-X = -1

Thus, asset with 1.7 is 200% and risk free asset is -100% which means risk free asset is in "short position"

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