Question

Suppose that the S&P 500, with a beta of 1.0, has an expected return of 12% and T-bills provide a risk-free return of 3%.

a.

What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of (i) 0; (ii) .25; (iii) .50; (iv) .75; (v) 1.0? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places.)

		Expected return			Beta
(i)	0		%
(ii)	.25		%
(iii)	.50		%
(iv)	.75		%
(v)	1.0		%
please provide the explanation as to how to get this answer?

Answer 1

Statement showing computations
Particulars	Expected Return	Beta	Working notes = ER	Working notes = Beta
(i) 0	3%	-	0*12% + 1*3%	0*1 + 1*0
(ii) .25	5.25%	0.25	.25*12% + .75*3%	.25*1 + .75*0
(iii) .50	7.50%	0.50	.5*12% + .5*3%	.5*1 + .5*0
(iv) .75	9.75%	0.75	.75*12% + .25*3%	.75*1 + .25*0
(v) 1	12%	1.00	1*12% + 0*3%	1*1 + 0*0