Asset W has an expected return of 12.0 percent and a beta of 1.1. If the risk-fr
ID: 2643778 • Letter: A
Question
Asset W has an expected return of 12.0 percent and a beta of 1.1. If the risk-free rate is 4 percent, complete the following table portfolios of Asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfolio beta by plotting the expected returns ageist the betas. What is the slope of the line that results. Percentage of Portfolio in Asset W Portfolio Expected Return Portfolio Beta 0% 25% 50% 75% 100% 125% 150% Asset W has an expected return of 12.0 percent and a beta of 1.1. If the risk-free rate is 4 percent, complete the following table portfolios of Asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfolio beta by plotting the expected returns ageist the betas. What is the slope of the line that results. Percentage of Portfolio in Asset W Portfolio Expected Return Portfolio Beta 0% 25% 50% 75% 100% 125% 150%Explanation / Answer
portifolio beta = weight of asset W * beta of assetW + (1-weight of rsik free asset) * 0 ( since riskfree rate has beta 0)
using capm model
12% = 4% + 1.1 * market risk premium
= 7.27%
expected return of portifolio = riskfree rate + beta of portifolio * market risk premium
the slope of the line is market risk premium
percentage of portfolio Portifolio expected retun Portifolio beta 0% 4.00% 0 25% 6.00% 0.275 50% 8.00% 0.55 100% 12.00% 1.1 125% 14.00% 1.375 150% 16.00% 1.65