Problem 11-17 Using CAPM [LO 4] A stock has a beta of 1.3 and an expected return
ID: 2767366 • Letter: P
Question
Problem 11-17 Using CAPM [LO 4]
A stock has a beta of 1.3 and an expected return of 12.8 percent. A risk-free asset currently earns 4.3 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 percentage rounded to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 0.9, 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 12 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
If a portfolio of the two assets has a beta of 2.5, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
A stock has a beta of 1.3 and an expected return of 12.8 percent. A risk-free asset currently earns 4.3 percent.
Explanation / Answer
(a) Expected Return = (12.8*.5) + (4.3*.5) = 8.55%
(b) WEight of stock A = 0.9/1.3 = 69.23%
Weight of risk free asset = 1-.6923 = 30.77%
(c) Weight of Stock A in this case = 90%
Beta = .9*1.3 = 1.17
(d) Weight of Stock A = 1.3/2.5 = 52%
Weight of risk free = 1-52% = 48%