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    CAPM (Capital Asset Pricing Model)

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    1) A stock has a beta of 1.15 and an expected return of 16 percent. A risk-free asset currently earns 4 percent.
    a. The expected return on a portfolio that is equally invested in the two assets is ________ percent. (Input answer as a percent rounded to 2 decimal places, without the percent sign.)
    b. If a portfolio of the two assets has a beta of 0.7, the weight of the stock is ________ percent and the weight of the risk-free is percent (Input answers as a percent rounded to 4 decimal places, without the percent sign).
    c. If a portfolio of the two assets has an expected return of 11 percent, its beta is ________ . (Round answer to 6 decimal places.)
    d. If a portfolio of the two assets has a beta of 2.3, the weight of the stock is _______ percent and the weight of the risk-free is ________percent (Input answers as a percent rounded to 2 decimal places, without the percent sign).

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    Solution Preview

    A stock has a beta of 1.15 and an expected return of 16 percent. A risk-free asset currently earns 4 percent.

    Beta of stock= 1.5
    beta of risk free asset= 0
    expected return on stock=r1= 16% or 0.16
    expected return on risk free asset=r2= 4% or 0.04

    Let the weights of stock and the risk free asset in portfolio be w1 and w2
    Expected return on portfolio:
    r p=summation of wi* ri = w1* r1 + w2*r2 = 0.16w1+.04 w2
    Beta of portfolio:
    beta p=summation of wi* beta i= ...

    Solution Summary

    Answers questions based on CAPM (Capital Asset Pricing Model)

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