Question

Stock J has a beta of 1.26 and an expected return of 13.46 percent, while Stock K has a beta of .81 and an expected return of 10.4 percent. You want a portfolio with the same risk as the market. a. What is the portfolio weight of each stock

Answer 1

Answer:

J = 0.422

K = 0.58

Explanation:

When a portfolio is said to have risk that is equal to market, this means that the beta is equal to 1.

Let us define the weight of stock J = x

Let us define the Weight of stock K = (1-x)

To get the The Beta of portfolio = (x*1.26) + ((1-x)*0.81) = 1

When we open the brackets,

1.26x + 0.81 - .81x = 1

1.26x-0.81x = 1-0.81

0.45x = 0.19

To get x we divide through by 0.45

X = 0.422

Therefore the Weight of stock J = 0.422

Then the Weight of stock K = 1 - 0.422 = 0.578

Approximately 0.58