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

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    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 = ...

    Solution Summary

    You will find the answer to this puzzling question inside...

    $2.19

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