Question

Asked Nov 24, 2019

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A stock has a beta of 1.8 and an expected return of 13 percent. A risk-free asset currently earns 3.2 percent. If a portfolio of the two assets has a beta of 3.6, what are the portfolio weights? **(Do not round intermediate calculations. A negative answer should be indicated by a minus sign. Round your answers to the nearest whole number, e.g., 32.)**

Step 1

Assume that the weight of risk-free asset be y. Thus, the weight of stock be (1-y).

The below expression can be used to calculate the weight of stock.

Step 2

Substitute (1-y) for weight of stock, 1.8 for beta of stock, y for weight of risk-free asset, 0 for beta of risk-free asset and 3.6 for portfolio beta,

Step 3

Weight for risk-free asset is -1. Thus, weight ...

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