Question

A stock has a beta of 1.05 and an expected return of 11 percent. A risk-free asset currently earns 2.4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If a portfolio of the two assets has a beta of .63, what are the portfolio weights?

Answer 1

a. 6.7%

b. 0.6 and 0.4

Step-by-step explanation:

The computations are shown below:

a. Expected rate of return = (Probability 1 × Possible Returns 1) + (Probability 2 × Possible Returns 2)

= (0.50 × 0.11) + (0.50 × 0.024)

= 0.055 + 0.012

= 6.7%

b. Portfolio beta = beta of stock × weightage of stock + beta of risk free asset × weightage of risk free asset

0.63 = 1.05 × weightage of stock + 0

So, Weightage of stock = 0.6

And, the weightage of risk free asset is 0.4