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Risk and Return Porfolio Weights and the Security Market Line Do not round any calculations From the Topic "Application of the SML"pp. 240-242 An investor wants to build a 2-stock portfolio of the following stocks: Stock Beta 1.3 0.85 Expected Return 7.80% 5.80% 14 If the investor wants the Portfolio Beta to be 1.1, what should the weights of each stock be in the portfolio? 16 sub-calc area Desired Portfolio beta: Weight of Stock A: Weight of Stock B: Based on your answer to part a, what would the Expected Return of the Portfolio be? Portfolio Expected Return: Using the same stock information, what would the Market Risk Premium (MRP) and Risk-Free Rate (Rf) be? Market Risk Premium: Risk-Free Rate:

Answer 1

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VULULLE Answer Given B of Az 1.3 B of B 20.85 Portfolio Beta z 11 i stock A=x an weight of Stock B = 1-4 Let (2x1.3 + (1-2) (085) z 1.) 1.3x+ 0.85-01852 = 1) 0,45n = lol-0.85 0.usaa 0.25 x20.55 I-az 0.45 weight of stock A= 0.55 stock B &0.45 Retion of A à 7.8.1. Return of B 658.l. Portfolio Expected return = 0.55 (7.6) +0.45 (518) 2 4:29+ 2.61 =16:911. the CAPM - ke = Rf + B (Rm-R4) 6.9 RJ + 1.1 (Rm - Rf) 6.9 = R + 1. 1RM-11Rf 6.921.1 Rm-0.1 Rf