Asset W has an expected return of 12.6 percent and a beta of 1.25. If the risk-f

Question

Asset W has an expected return of 12.6 percent and a beta of 1.25. If the risk-free rate is 4.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Leave no cells blank -be certain to enter "O" wherever required. Do not round intermediate calculations. Enter your expected returns as a percent rounded to 2 decimal places, e.g., 32.16, and your beta answers to 3 decimal places, e.g., 32.161.) 5 Percentage of Portfolio in Asset W Expected Return 100 125 If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 0 Slope of the line

Explanation / Answer

First we need to find the B of the portfolio. The B of the risk free asset is zero and the weight of the risk free asset is one minus the weight of the stock.So, to find the B of the portfolio for any weight of the stock we simply multiply the weight of the stock times its B.

Even though we are solving for the B and expected return of a portfolio of one stock and the risk free asset for different portfolio weights we are really solving for the SML.Any combination of this stock, and the risk free asset will fall on the SML.For that matter a portfolios of any stock and the risk free asset or any portfolio of stocks will fall on the SML.We know the slope of the SML line is the market risk premium which is 5.00%.

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