Question

You invest $1000 in a risky asset with an expected rate of return of 0.14 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.06. The risky asset has a beta of 1.4. If you have a risk-aversion parameter of 2.5, what is the beta of your complete portfolio? A. 0.28 B. 0.80 C. 1.00 D. 1.12 E. 1.32

Answer #2

**The correct answer is option D. 1.12**

Using the following equation,

Weight in risky asset=

Where E(rp) = Expected Return on Risky Portfolio i.e. 14%

Rf = Risk free Rate i.e. 6%

A = Risk Aversion i.e. 2.5

SD = Standard Deviation i.e. 0.2

Weight in risky asset= = 80%

Weight in risk free asset = 100% - 80% = 20%

Portfolio Beta is weighted average beta of assets, beta of risk free asset is 0.

therefore, beta of portfolio = beta of riksy asset x weight of risky asset

Beta of complete portfolio = 1.4 x 80% = 1.12

Hence, **option D. 1.12** is correct

For more clarrification please comment

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answered by: anonymous

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