Question
You invest $1000 in a risky asset with an expected rate of return of 0.14 and...
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
Homework Answers
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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