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?

Question

Business

Mariana

2 June, 02:45

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?

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Answers (1)

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Leanna · Answer 1

a. 6.7%

b. 0.6 and 0.4

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