Problem 11-23 Calculating Portfolio Weights [LO 1] Stock J has a beta of 1.24 an
ID: 2735899 • Letter: P
Question
Problem 11-23 Calculating Portfolio Weights [LO 1]
Stock J has a beta of 1.24 and an expected return of 13.36 percent, while Stock K has a beta of 0.79 and an expected return of 10.3 percent. You want a portfolio with the same risk as the market.
What is the expected return of your portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Stock J has a beta of 1.24 and an expected return of 13.36 percent, while Stock K has a beta of 0.79 and an expected return of 10.3 percent. You want a portfolio with the same risk as the market.
Explanation / Answer
Beta for risk-free security = 0
let the weight of stock A in portfolio = w
0.79 = w*1.24 +(1-w)*0
w=0.6371
portfolio's rate of return = 0.6371*13.36% + 10.3%(1-0.6371)
=12.2495%