Question

Different investor weights. Two risky portfolios exist for investing: one is a bond portfolio with a beta of 0.7 and an expected return of 6.5%, and the other is an equity portfolio with a beta of 1.4 and an expected return of 16.6%. If these portfolios are the only two available assets for investing, what combination of these two assets will give the following investors their desired level of expected return? What is the beta of each investor's combined bond and equity portfolio? a. Bart: desired expected return 16% b. Lisa: desired expected return 14% C. Maggie: desired expected return 12% a. The combination of these two assets that will give Bart an expected return of 16% is 5.94 % in bonds and 94.06 % in stocks. (Round both answers to two decimal places.) With this combination of the bond and equity portfolio, Bart will have a portfolio beta of 14. (Round to one decimal place) b. The combination of these two assets that will give Lisa an expected return of 14% is places.) % in bonds and % in stocks. (Round both answers to two decimal

Answer 1

Portfolio return is equal to weighted average return. Portfolio beta is weighted average beta

a.Let % investment in bonds be x

16% = 6.5%x + 16.6%(1-x)

X = 5.94%

Hence, 5.94% in bonds and 94.06% in Stocks

Portfolio beta = 0.7*5.94% +1.4*94.06%

= 1.35842

i.e. 1.4

b.14% = 6.5%x +16.6%(1-x)

x = 25.74%

Hence, 25.74% in bonds

And 74.26% in stock

Beta = 1.21982

c.12% = 6.5%x + 16.6%(1-x)

x = 45.54%

i.e. 45.54% in bonds and

54.46% in stocks

Beta = 1.08122