Question

Suppose that the S&P 500, with a beta of 1.0, has an expected return of 14% and T-bills provide a risk-free return of 5%.

a. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of (i) 0; (ii) 0.25; (iii) 0.50; (iv) 0.75; (v) 1.0? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter the value of Expected return as a percentage rounded to 2 decimal places and value of Beta rounded to 2 decimal places.)

b. How does expected return vary with beta? (Do not round intermediate calculations.)

The expected return____by_____% for a one unit increase in beta.

Answer 1

Expected Return on portfolio is equal to weighted average return
Portfolio beta is equal to weighted average beta
Beta of risk free asset is equal to 0
Weight of S&P	Portfolio Return %	Portfolio Beta
0	5	0
0.25	7.25	0.25
0.5	9.5	0.5
0.75	11.75	0.75
1	14	1
The expected Return increases by 14% for one unit increase in beta

For evert 1 increase in beta, return will increase by 14%