a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta?

a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Using CAPM [LO4] A stock has a beta of 1.35 and an expected return of
16 percent. A risk free asset currently earns 4.8 percent.
a. What is the expected return on a portfolio that is equally invested in the two
assets?
b. If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 8 percent, what is its
beta?
d. If a portfolio of the two assets has a beta of 2.70, what are the portfolio weights
How do you interpret the weights for the two assets in this case? Explain.

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