Question

Asset W has an expected return of 12.8 percent and a beta of 1.25. If the risk-free rate is 4.7 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your expected returns as a percent rounded to 2 decimal places, e.g., 32.16, and your beta answers to 3 decimal places, e.g., 32.161.) Percentage of Portfolio in Asset W Portfolio Expected Return Portfolio Beta 0 % % 25 % 50 % 75 % 100 % 125 % 150 % If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Slope of the line %?

Answer 1

Solution:

a)

Percentage of Portfolio inAsset W	Percentage of Portfolio in Risk freeAssets	Portfolio Expected Return	Portfolio Beta
[a]	[b = 100-a]	[ c = a%*12.8% + b%*4.7%]	[ d = a%*1.25 + b%*0]
0	100	4.70%	0
25	75	6.73%	0.313
50	50	8.75%	0.625
75	25	10.78%	0.938
100	0	12.80%	1.250
125	-25	14.83%	1.563
150	-50	16.85%	1.875

b)

Slope of the line =( Expected Return in Asset W - RiskFree rate)/Beta

Slope of the line = (12.80% - 4.7%)/1.25

Slope of the line = 6.48%