Problem 11-23 Calculating Portfolio Weights [LO 1] Stock J has a beta of 1.35 an
ID: 2765874 • Letter: P
Question
Problem 11-23 Calculating Portfolio Weights [LO 1]
Stock J has a beta of 1.35 and an expected return of 13.91 percent, while Stock K has a beta of 0.9 and an expected return of 10.85 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 1.35 and an expected return of 13.91 percent, while Stock K has a beta of 0.9 and an expected return of 10.85 percent. You want a portfolio with the same risk as the market.
Explanation / Answer
Let weight of stock J be x and stock K be 1-x 1.35x + .9(1-x) = 1 1.35x + .9 - .9x =1 .45x = .10 x = .2222 Stock J = .2222 Stock K =1- .2222= .7778 Expected return of portfolio = .2222 *13.91% + .7778*10.85% Expected return of portfolio = 3.09% + 8.44% Expected return of portfolio = 11.53%