Answer:
a. E(Rp) = W1 * E(R1) + W2 * E(R2) : W = Weight of risk free asset in portfolio
, E(R) = Return of risk free asset
Expected Return of Portfolio = 0.5*3.6 + 0.5*15
Expected Return of Portfolio = 1.8 + 7.5
Expected Return of Portfolio = 9.3%
b. When a portfolio is composed of one risk free asset and one another risky stock
бp = W1 * б1
The S.D. of a stock or portfolio in this case as given by Beta
0.95 = W1 * 1.9
W1 = 0.95/1.9
W1 = 50%
Weight of risk free asset = 1 - 0.5
Weight of risk free asset = 50%
c. E(Rp) = W1 * E(R1) + W2 * E(R2)
7 = W1 * 3.6 + W2 * 15
With Trial and error method: W1 = 0.7, W2 = 0.3
Beta of Portfolio = 0.3 * 1.9
Beta of Portfolio = 0.57
d. Beta of Portfolio = Weight of risky asset * Beta of risky stock
3.8 = W * 1.9
W = 3.8/1.9
W = 2
Weight of risk free asset = 1 - 2
Weight of risk free asset = -1.
