In: Finance
A stock has a beta of 0.5 and an expected return of 9.6 percent. A risk-free asset currently earns 3.3 percent. If a portfolio of the two assets has an expected return of 12 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
As per CAPM, expected return of a asset or portfolio can be calculated with following equation -
rf = risk free return
rm = market return
B = Beta
E(r) = Expected return
In above case, Firstly, we need to calculate Market return(rm) with the help a stock details provided.
rf = 3.3% = 0.033
E(ra) = 9.6% = 0.096
Beta = 0.5
Thus,
Market return = 15.9%
We have following details about portfolio -
Expected Return (Ep) = 12% = 0.12
rf = 0.033
rm = 0.159
We can calculate beta of portfolio with CAPM formula -
Beta of Portfolio would be 0.69
Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.