Question

In: Finance

Stock J has a beta of 1.5 and an expected return of 15%, while Stock K has a beta of .75 and an expected return of 9%.

Stock J has a beta of 1.5 and an expected return of 15%, while Stock K has a beta of .75 and an expected return of 9%. You want a portfolio with the same risk as the market. What is the expected return of your portfolio?

Group of answer choices

10 percent

11 percent

12 percent

13 percent

14 percent

Expert Solution

Beta of market=1

Hence required portfolio beta=1

Let investment in J=x

Hence investment in K=(1-x)

Portfolio beta=Respective beta*Respective weight

1=x*1.5+(1-x)*0.75

1=1.5x+0.75-0.75x

x=(1-0.75)/(1.5-0.75)

=0.3333(Approx)=investment in J

investment in K=(1-0.3333)

=0.6667(Approx)

Portfolio return=Respective return*Respective weight

=(0.3333*15)+(0.6667*9)

=11%

jeff jeffy answered 2 years ago

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