Question

tock J has a beta of 1.38 and an expected return of 14.06 percent, while Stock K has a beta of .93 and an expected return of 11 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., 32.1616.)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:

By definition, we know that Beta for market Portfolio is 1. By this, we need weighted average of J and K Beta as 1

1.38x + 0.93(1-x) = 1

1.38x + 0.93-0.93x = 1

0.45x = 0.07

x = 0.07/0.45

x = 0.16

So, we need 0.16 of J and 0.84 of K.

Weighted Average of J = 0.16 and K = 0.84.

Further Expected return of portfolio will be:

    Weight  Expected Return  Expected Return of Portfolio

J    0.16                 14.06                        2.25

K   0.84                   11                            9.24

Total Portfolio Expected Return        11.49