Question

Stock X has a beta of 1.4 and stock Y has a beta of 0.8. The market risk premium is 5.0% and the risk-free rate is 2.0%. What is the expected return for a portfolio equally invested in stock Y and the risk-free asset?

a. 9.8%.
b. 7.5%.
c. 5.5%.
d. 4%.

Answer 1

d. 4%.

Step-by-step explanation:

The computation is shown below;

We know that

Expected stock return = Risk free rate + Beta × Market risk premium

So,

Expected stock return X is

= 2% + 1.4 × 5%

= 9%

And,

Expected stock return Y is

= 2% +.8 × 5%

= 6%

Now

Expected Portfolio return Y and risk free asset is

= Weight stock y × return Y + Weight risk-free asset × Return risk-free asset

= .5 × 6% + .5 × 2%

= 4%