Stock A has an expected return of 10% and a beta of 1.0. Stock B has a beta of 2.0. Portfolio P is a two-stock portfolio, where part of the portfolio is invested in Stock A and the other part is invested in Stock B. Assume that the risk-free rate is 5% and that the market is in equilibrium. Portfolio P has an expected return of 12%. What proportion of Portfolio P consists of Stock B?
We first calculate the expected return on Stock B. For this we use the CAPM to find the market risk premium
Expected return = Rf + (Rm-Rf) X ...
The solution explains how to calculate the proportion of stock B in the total portfolio