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Problem 13-20 Using CAPM (L04) A stock has a beta of 1.60 and an expected return of 10 percent. A risk-free asset currently e
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Answer #1

a

Weight of stock = 0.5
Weight of Risk free = 0.5
Exp return of Portfolio = Weight of stock*Exp return of stock+Weight of Risk free*Exp return of Risk free
Exp return of Portfolio = 10*0.5+2.4*0.5
Exp return of Portfolio = 6.2

b

Beta of Portfolio = Weight of stock*Beta of stock+Weight of Risk free*Beta of Risk free
0.88 = 1.6*Weight of stock+0*(1-weight of stock)
Weight of stock = 0.55
Weight of Risk free =1-weight of stock=1-0.55=0.45

c

Exp return of Portfolio = Weight of stock*Exp return of stock+Weight of Risk free*Exp return of Risk free
9 = 10*Weight of stock+2.4*(1-weight of stock)
Weight of stock = 0.8684
Weight of Risk free =1-weight of stock=1-0.8684=0.1316
Weight of stock = 0.8684
Weight of Risk free = 0.1316
Beta of Portfolio = Weight of stock*Beta of stock+Weight of Risk free*Beta of Risk free
Beta of Portfolio = 1.6*0.8684+0*0.1316
Beta of Portfolio = 1.389

d

Beta of Portfolio = Weight of stock*Beta of stock+Weight of Risk free*Beta of Risk free
3.2 = 1.6*Weight of stock+0*(1-weight of stock)
Weight of stock = 2
Weight of Risk free =1-weight of stock=1-2=-1
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