I have a class soon. Using my textbook, I have to prepare for the class exam. But I do not have an answer paper.
Would you guys kindly see if I am correct.
An equity has a beta of 1.2 and an expected return of 16 per cent. A risk-free asset currently earns 5 per cent.
(a). what is the expected return on portfolio that is equally invested in the two assets? ( 10.5 % )
Solution: 0.5x16%+0.5x5%
(b). If a portfolio of the two assets has a beta of 0.75 what are the portfolio weights? (0.625)
Solution: 0.75=1.2x+0x(1-x) risk free asset has a zero beta.
©. If a portfolio of the two assets has an expected return of 8 percent what is its beta (??)
(d). If a portfolio of the two assets has a beta 2.4 what are portfolio weights? ( 200%)
How do you interpret the weights for the two assets in this case? (Borrow risk free asset and invests in an assets whose beta is 2.4
Solution: 2.4=1.2x+0x(1-x)