Question

Different investor weights. Two risky portfolios exist for? investing: one is a bond portfolio with a beta of 0.5 and an expected return of 6.5?%, and the other is an equity portfolio with a beta of 1.2 and an expected return of 16.6?%. If these portfolios are the only two available assets for? investing, what combination of these two assets will give the following investors their desired level of expected? return? What is the beta of each? investor's combined bond and equity? portfolio? a.???Bart: desired expected return 16?% b.???Lisa: desired expected return 14?% c.???Maggie: desired expected return 12?% a.??The combination of these two assets that will give Bart an expected return of 16?% is nothing?% in bonds and nothing?% in stocks.???(Round both answers to two decimal? places.)

Answer 1

Bond Beta = 0.5, Expected Return = 6,5 %

Equity Beta = 1.2 and Expected Return = 16.6 %

(a) Let the bond weightage be D and equity weightage be 1-D

Required Return = 16 %

Therefore, 16 = D x 6.5 + 16.6 x (1-D)

D = 0.059 and 1-D = 0.941

Portfolio Beta = 0.5 x 0.059 + 1.2 x 0.941 = 1.1587

(b)

Let the bond weightage be D and equity weightage be 1-D

Required Return = 14 %

Therefore, 14 = D x 6.5 + 16.6 x (1-D)

D = 0.257 and 1-D = 0.743

Portfolio Beta = 0.5 x 0.257 + 1.2 x 0.743 = 1.0201

(c)

Let the bond weightage be D and equity weightage be 1-D

Required Return = 12 %

Therefore, 12 = D x 6.5 + 16.6 x (1-D)

D = 0.455 and 1-D = 0.545

Portfolio Beta = 0.5 x 0.455 + 1.2 x 0.545 = 0.8815