Question

A stock has a beta of 1.65 and an expected return of 11 percent. A risk-free asset currently earns 2.6 percent. What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return ________

Answer 1

The expected return on a portfolio equally invested in a stock with a beta of 1.65 and an expected return of 11 percent and a risk-free asset earning 2.6 percent is 6.80 percent.

Step-by-step explanation:

To calculate the expected return on a portfolio that is equally invested in a stock with a beta of 1.65 and an expected return of 11 percent, and a risk-free asset that earns 2.6 percent, you would use the formula for a weighted average. Since the portfolio is equally invested in both assets, the weights are 0.5 for each. The calculation is as follows:

Expected Return on Portfolio = (Weight of Stock × Expected Return of Stock) + (Weight of Risk-free Asset × Expected Return of Risk-free Asset)

Expected Return on Portfolio = (0.5 × 11%) + (0.5 × 2.6%)

Expected Return on Portfolio = 5.5% + 1.3%

Expected Return on Portfolio = 6.80%