Question

Please solve for green boxes and please show excel formulas.

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% If the investor wants the Portfolio Beta to be 1.1, what should the weights of each stock be in the portfolio? 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 Retur: 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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Please find below the answer
Statement showing Computations
Particulars	Amount
Let weight of stock A be w
Let weight of stock B be 1-w
1.1 = 1.3*w + .85 (1-w)
1.1 = 1.3w=.85 - .85w
.25 = .45w
w = .25/.45 = .5556
1-w = 1-.5556 = .4444
Weight of stock A=	0.5556
Weight of stock B	0.4444
Portfolio Expected return = 7.80%*.5556 + 5.80%*.4444
Portfolio Expected return = 4.33%+ 2.58%	6.91%
Stock A
7.80% = Rf + 1.3*MRP
Rf = 7.80% - 1.3MRP
Stock B
5.80% = Rf + .85*MRP
Rf = 5.80% - .85MRP
7.80% - 1.3MRP = 5.80% - .85MRP
2.00% =.45MRP
MRP = 2.0%/.45
Market risk premium	4.44%
Rf = 5.80% - .85*4.44%	2.03%
Risk free rate is 2.03%