1. Risk free asset standard deviation =0
Beta of Stock =1.23
a) Expected Return = 50%*Return of Stock+50%*Risk Free Asset
=50%*12.1%+50%*3.95% =8.03%
b) Let us assume weight of stock =x
Portfolio Beta = Weight of Stock*Beta of Stock+Weight of Risk free
Asset*Beta of Risk free Assets
0.83 =x*1.23+0
x =0.83/1.23 =67.48%
Weight of stock =67.48%
Weight of risk free asset =1-x =1-67.48% =32.52% or 0.3252
c.Expected Return = Weight of Stock*Return of Stock+(1-Weight of
Stock)*Risk Free Asset
11.3% =Weight of Stock*12.1%+(1-weight of Stock)*3.95%
11.3% -3.95% = Weight of Stock*(12.1%-3.95%)
Weight of Stock =(11.3% -3.95%)/(12.1%-3.95%) =90.18%
Weight of Risk Free assets =1-90.18% =9.82%
Beta = Weight of Stock* Beta of Stock + 0
Beta =90.18%*1.23 =1.11
d. Weight of Stock = Beta of Asset/Beta of equity =2.43/1.23
=1.9756
Weight of Risk free asset =1-1.9756 =-0.9756
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