Problem 13-20 Using CAPM [LO4] A stock has a beta of 1.20 and an expected return
ID: 2716875 • Letter: P
Question
Problem 13-20 Using CAPM [LO4]
A stock has a beta of 1.20 and an expected return of 14 percent. A risk-free asset currently earns 3 percent.
What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
If a portfolio of the two assets has a beta of .72, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)
If a portfolio of the two assets has an expected return of 10 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
If a portfolio of the two assets has a beta of 2.40, what are the portfolio weights? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a whole number.)
A stock has a beta of 1.20 and an expected return of 14 percent. A risk-free asset currently earns 3 percent.
Explanation / Answer
a. portfolio return = 0.5*14 + 0.5* 3 = 8.5%
b. Portfolio beta= weight of stock * beta of stock
(beta of risk free asset = 0)
0.72 = weight of stock*1.2
weight of stock = 0.6
Weight of risk free asset = 0.4
c.portfolio return = weight of stock* return of stock +(1 -weight of stock)*return of risk free asset
10 = weight of stock*14 + ( 1-weight of stock)*3
weight of stock = 0.6363
Portfolio beta= weight of stock * beta of stock
0.6363*1.2 = 0.764
d) Portfolio beta= weight of stock * beta of stock
2.4 = weight of stock*1.2
weight of stock = 2
weight of risk free asset = 1-2 = -1