Question

1.A stock has a beta of 1.08 and an expected return of 9.32 percent. If the stock's reward-to-risk ratio is 6.35 percent, what is the risk-free rate?

2. A portfolio consists of $15,600 in Stock M and $24,400 invested in Stock N. The expected return on these stocks is 9.10 percent and 12.70 percent, respectively. What is the expected return on the portfolio?

Answer 1

Question 1

Reward-to-risk ratio = (expected return-risk-free rate)/beta

6.35 = (9.32-Rf)/1.08

9.32-Rf = 6.35*1.08

= 6.858

Rf = 9.32-6.858

risk-free rate = 2.462%

​​​​​​​Question 2

The return of a portfolio is the weighted average return of the securities which constitute the porfolio

Stock	Investment	Weight	Expected Return (%)	Weight*Expected Return
M	15600	0.39*	9.10	3.55
N	24400	0.61**	12.70	7.75

Portfolio Return = Weight*Expected Return

= 3.55+7.75

= 11.30%

Weight of M = 15600/(15600+24400) = .39

Weight of N = 1-.39 = .61