Question

Suppose that the S&P 500, with a beta of 1.0, has an expected return of 11% and T-bills provide a risk-free return of 4%.

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.)

		Expected Return		Beta
(i)	0		%
(ii)	0.25		%
(iii)	0.50		%
(iv)	0.75		%
(v)	1.0		%

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

The expected return (increases/decreases) by ____% for a one unit increase in beta

Answer 1