Question

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Asset W has an expected return of 10.8 percent and a beta of 1.25. If the risk-free rate is 3.4 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Leave no cells blank - be certain to enter "O" wherever required. Do not round intermediate calculations. Enter your expected returns as a percent rounded to 2 decimal places, e.g., 32.16, and your beta answers to 3 decimal places, e.g., 32.161.) 10 points Percentage of Portfolio in Asset W Portfolio Expected Return Portfolio Beta Skipped 25 % 50 100 % 125 150 % If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Slope of the line

Answer 1

The ß of the risk-free asset is zero, and the weight of the risk-free asset is one minus the weight of the stock, so the ß of the portfolio is: Bp = WW(1.25) + (1 - ww)(0) 1.25 ww E(Rw) = 0.108 .108 = .034 + MRP * 1.25 .108 - .034 = MRP *1.25 .074 = MRP *1.25 MRP = 0.074 1.25 MRP = 5.92% E(Rp) = .034 + .0592Bp

Percentage of Portfolio in Asset Portfolio Bets 0% 25% 50% 75% 100% 125% 150% Portfolio Expected Return 3.40% 5.25% 7.10% 8.95% 10.80% 12.65% 14.50% 0 0.313 0.625 0.938 1.250 1.563 1.875 b) Slope of the Line = 5.92% 17 78