Bookmarks p UNCW Email Welcome, Reanna-.. Cavapoo Puppies F-M FIN 330 Homework Q

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Bookmarks p UNCW Email Welcome, Reanna-.. Cavapoo Puppies F-M FIN 330 Homework Question 1 (of 3) value: 10.00 points A stock has a beta of 1.2 and an expected return of 8 percent. A risk-free asset currently earns 3 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? (Round your answer to 2 decimal places. Omit the "%"sign in your response.) Expected return to 2 decimal places. Omit the "%" sign in your response.) b. If a portfolio of the two assets has a beta of 1.0, what are the portfolio weights?/Round your answers Weight xs c. If a portfolio of the two assets has an expected return of 6 percent, what is ts beta? (Round your answer to 2 decimal places.) Beta d. If a portfolio of the two assets has a beta of 2.40, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Omit the "%" sign in your response.) Weight Xs Xrf 8 MacBook Air

Explanation / Answer

Expected return is the weighted average of individual returns

a.

Expected return = 0.5*0.08 + 0.5*0.03 = 5.5%

b.

Portfolio beta is the weighted average of individual betas, and the beta of a risk free asset is zero.

Let Xs be the weight in stock

1 = Xs*1.2 + (1-Xs)*0

Xs = 0.8333 = 83.33%

Xrf = 1-Xs = 1-83.33% = 16.67%

c.

Expected return of the portfolio = Xs*0.08 + (1-Xs)*0.03 = 0.06

Xs = 0.6

Xrf = 1-0.6 = 0.4

Portfolio beta = 0.6*1.2 + 0.4*0 = 0.72

d.

2.4 = Xs*1.2 + (1-Xs)*0

Xs = 2 = 200%

Xrf = 1-Xs = 1-2 = -100%

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