Question

If a portfollio consists of a stock which comprises 30%of the investment with an expected return...

If a portfollio consists of a stock which comprises 30%of the investment with an expected return of 14%,
and a beta of 1.4, while the risk free asset has a return of 5%, what is the beta of the portfollio?
a.
          0.42
b.
          0.24
c.
          0.98
d.
          0.65

What is the expected return on the portfollio from the previous question?

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Answer #1

Beta of portfolio = Beta of stock A * Weight Of Stock A + Beta of stock B * Weight Of Stock B

Stock B in our case is risk free asset therefore the beta of stock B is zero

According to Question

Beta Of Portfilio = 1.4*.30

Beta Of Portfilio = .42 i.e option A

Expected Return (ER) of portfolio = Expected Return of stock A * Weight Of Stock A + Expected Return of stock B * Weight Of Stock B

Weight Of Stock B= 1- Weight Of Stock A

=1-.30 =.70 = 70%

According to Question

ER of portfilio = .14*.30 + .05*.70

ER of portfilio = 7.7%

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