Question

Stock J has a beta of 1.23 and an expected return of 13.25 percent, while Stock K has a beta of .84 and an expected return of 10.60 percent. You want a portfolio with the same risk as the market.a. What is the portfolio weight of each stock? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) b. What is the expected return of your portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

• a. What is the portfolio weight of each stock?

Stock J    0,5047  

Stock K   0,4953

• b. What is the expected return of your portfolio?

Stock J   6,69%

Stock K   5,25%

Portfolio : 11,94%

Explanation:

To find the Beta that equals to market we need to know how much is x (weight of each stock in the portfolio) with an equation of one variable that equals to 1.

Portoflio with the same risk as the market means a beta of 1,00    

1,23 (x) + 0,84 (1-x) = 1    Stock J = 0,4103  

1,23x + 0,84 - 0,84x = 1    Stock K = 0,5897  

1,23x - 0,84x = 0,16    

0,39x = 0,16    

x = 0,16/0,39    

x = 0,4103    

The expected return of the portfolio it's defined by the weight of each stock and the expected return.

Stock J  13,25%  0,5047  6,69%

Stock K  10,60%  0,4953  5,25%

Portfolio       1,00  11,94%