Ask Question
5 November, 10:20

Jackie has one risk-free asset and one risky stock in her portfolio. The risk-free has an expected return of 3.2 percent. The risky asset has a beta of 1.3 and an expected return of 14.9 percent. What is the expected return on the portfolio if the portfolio beta is 0.975?

+1
Answers (1)
  1. 5 November, 10:26
    0
    Portfolio Return = 11.975%

    Explanation:

    The portfolio return is calculated by taking the weights of individual securities in a portfolio and multiplying them by the return of individual securities. The formula can be written as,

    Portfolio return = wA * rA + wB * rB

    Where,

    wA is the weight of security A rA is the return on security A wB is the weight of security B rB is the return on security B

    The risk free asset has a beta of zero.

    Let the weight of risk free asset be x. The weight of risky asset is 1-x.

    Portfolio beta = 0.975 = x * 0 + (1-x) * 1.3

    0.975 = 1.3 - 1.3x

    0.975 - 1.3 = - 1.3x

    -0.325 / - 1.3 = x

    x = 0.25

    Portfolio return = 0.25 * 0.032 + (1-0.25) * 0.149 = 0.11975 or 11.975%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Jackie has one risk-free asset and one risky stock in her portfolio. The risk-free has an expected return of 3.2 percent. The risky asset ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers