A stock has a beta of 1.80 and an expected return of 13 percent. A risk-free...
A stock has a beta of 1.80 and an expected return of 13 percent. A risk-free asset currently earns 3.2 percent.
a. What is the expected return on a portfolio that is equally invested in the two assets?
b. If a portfolio of the two assets has a beta of .99, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 9%, what is its beta?
d. If a portfolio of the two assets has a beta of 3.60, what are the portfolio weights?
Homework Answers
a.
Expected Rate = 0.50(0.13) + 0.50(0.032)
Expected Rate = 8.10%
b
0.99 = 1.80w
w = 0.55
55% in stock and 45% in risk free asset
c.
Using CAPM Model,
Rm = 0.032 + (0.13 - 0.032)/1.8 = 8.64%
Beta = (0.09 - 0.032)/(0.0864 - 0.032)
Beta = 1.07
d.
3.60 = 1.80w
w = 2
Weight of Stock = 200%
Weight of Risk Free Asset = -100%
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