# Using CAPM to calculate expected return, weight of a stock, and beta.

I was able to solve for part A of this problem but am having difficulty with the rest. The formula I used for part A is:

Exp. return of portfolio = w1*R1 + (1-w1)*R2

Exp. return of portfolio = 0.5*6.4 + 0.5*16 = 11.2%

A stock has a beta of 1.05 and an expected return of 16 percent. A risk-free asset currently earns 6.4 percent.

a. The expected return on a portfolio that is equally invested in the two assets is ______ %. (Round to 2 decimal places.)

Answer for a is 11.2%

b. If a portfolio of the two assets has a beta of 0.8, the weight of the stock is ______% and the weight of the risk-free is _______% (Round to 4 decimal places).

c. If a portfolio of the two assets has an expected return of 7 percent, its beta is ________. (Round to 6 decimal places.)

d. If a portfolio of the two assets has a beta of 2.55, the weight of the stock is _______& and the weight of the risk-free is _______% (Round to 2 decimal places). How do you interpret the weights for the two assets in this case? Explain

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#### Solution Preview

b) Portfolio beta = Stock beta*weight of stock

So we have 0.8=1.05*w

Solving we get w=0.7619

Weight of risk free asset = ...

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