An investor has a portfolio of two securities, a stock with a beta of 1.24 and a risk-free asset. The stock has an expected return of 13.68% and the risk-free asset has an expected return of 2.80%. The portfolio beta is 0.65. What rate of return should the investor expect to earn on her portfolio? Group of answer choices8.50%9.16%9.33%9.41%

Question

Asked Nov 3, 2019

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An investor has a portfolio of two securities, a stock with a beta of 1.24 and a risk-free asset. The stock has an expected return of 13.68% and the risk-free asset has an expected return of 2.80%. The portfolio beta is 0.65. What rate of return should the investor expect to earn on her portfolio?

Group of answer choices

8.50%

9.16%

9.33%

9.41%

Expert Answer

Step 1

Suppose the weight of the stock in the portfolio be x, then the weight of the risk free asset in the portfolio will be 1-x.

Step 2

Image Transcription
Portfolio beta is calculated as: Portfolio beta = (Weight of the stock) x (Beta of the stock)(Weight of the risk free asset) x (Beta of the risk free asset)

Step 3

The beta of a risk free asset will be zero.
Given that portfolio beta is 0...

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