Question

In: Finance

A stock has a beta of 1.5, an expected return of 15%, and lies on the security market line.

A stock has a beta of 1.5, an expected return of 15%, and lies on the security market line. A risk-free asset is yielding 3%. You want to create a $10,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is .75. What rate of return should you expect to earn on your portfolio?

Group of answer choices

8 percent

9 percent

10 percent

11 percent

12 percent

Expert Solution

Portfolio Rate of Return = 9%

EXPLANATION

Portfolio Consisits of Stock A and Risk Free security .

Beta of Stock A is 1.5 and Beta of Risk Free Security is 0 . (Risk free securities has a beta of 0 as they are not affected by market Movements)

We want to achieve a portfolio Beta of .75

Weight of stock A = Wa

Weight of risk free security = Wrf

Wa * 1.5 + Wrf * 0 = .75

Wa = .5

Wrf = 1-.5 = .5

Expected return of portfolio = Wa * 15 + Wrf * 3

.5 * 15 + .5 * 3 = 9%

jeff jeffy answered 2 years ago

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