Final answer:
The expected return on a portfolio consisting of equal investments in a stock with a beta of 1.22 and an expected return of 12 percent, and a risk-free asset with a 3.9 percent return, is calculated to be 7.95 percent.
Step-by-step explanation:
The expected return on a portfolio that is equally invested in a stock with a beta of 1.22 and an expected return of 12 percent, and a risk-free asset earning 3.9 percent, can be calculated using the formula for the expected return of a portfolio. This involves calculating the weighted average of the individual expected returns, since the portfolio is equally invested in both assets.
To find this, we take the average of the two expected returns because the investment is equal in both assets:
(12% + 3.9%) / 2 = 7.95%
This result represents the average return the investor can expect from the portfolio, which balances between the higher risk and return of the stock and the lower risk and return of the risk-free asset.