Stock J has a beta of 1.23 and an expected return of 13.25 percent, while Stock K has a beta of. 84 and an expected return of 10.60 percent. You want a portfolio with the same risk as the market. a. What is the portfolio weight of each stock? (Do not round intermediate calculations and round your answers to 4 decimal places, e. g.,.1616.) b. What is the expected return of your portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Business

Tripp Chandler

27 September, 15:08

Stock J has a beta of 1.23 and an expected return of 13.25 percent, while Stock K has a beta of. 84 and an expected return of 10.60 percent. You want a portfolio with the same risk as the market. a. What is the portfolio weight of each stock? (Do not round intermediate calculations and round your answers to 4 decimal places, e. g.,.1616.) b. What is the expected return of your portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Answers (1)

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Lucas Compton · Answer 1

a. What is the portfolio weight of each stock?

Stock J 0,5047

Stock K 0,4953

b. What is the expected return of your portfolio?

Stock J 6,69%

Stock K 5,25%

Portfolio : 11,94%

Explanation:

To find the Beta that equals to market we need to know how much is x (weight of each stock in the portfolio) with an equation of one variable that equals to 1.

Portoflio with the same risk as the market means a beta of 1,00

1,23 (x) + 0,84 (1-x) = 1 Stock J = 0,4103

1,23x + 0,84 - 0,84x = 1 Stock K = 0,5897

1,23x - 0,84x = 0,16

0,39x = 0,16

x = 0,16/0,39

x = 0,4103

The expected return of the portfolio it's defined by the weight of each stock and the expected return.

Stock J 13,25% 0,5047 6,69%

Stock K 10,60% 0,4953 5,25%

Portfolio 1,00 11,94%