Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13% and

Question

Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13% and T-bills provide a risk-free return of 4%.

What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of (i) 0; (ii) .25; (iii) .50; (iv) .75; (v) 1.0? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places.)

  

How does expected return vary with beta? (Do not round intermediate calculations.)

I need help with part b! Please help!!!

Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13% and T-bills provide a risk-free return of 4%.

Explanation / Answer

Returns of the portfolio = 4% x (1 - w%) + 13% x w%

Using CAPM, Returns = Rf + beta x (Rm - Rf)

Beta = (Returns - 4%) / (13% - 4%)

b) Expected Return increase by Rm - Rf = 13% - 4% = 9% for one unit increase in beta.

w% Return Beta 0% 4.00% 0 25% 6.25% 0.25 50% 8.50% 0.5 75% 10.75% 0.75 100% 13.00% 1

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