Question

QUESTION 17 You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 126 and the total portfolio is equally as risky as the market. Required: What must the beta be for the other stock in your portfolio? (Round your answer to 2 decimal places (e.g. 32.16).) Beta: QUESTION 18 A stock has a beta of 4.80 percent 92, the expected return on the market is 10.3 percent, and the risk-free rate is Required: What must the expected return on this stock be? (Do not include the percent sign (X). Round your answer to 2 decimal places (eg 32.16).)

Answer 1

Dear student, only one question is allowed at a time. I am answering the first question

17)

Weight of each of the risk free asset and the stocks is equal in the portfolio

So, weight of each

= 1 / 3

= 0.33

Now, beta of risk free asset is always equal to 0 as it is a risk free asset

Beta of the other stock is given as 1.26

Let beta of the third stock be X

Now, as the portfolio is as risky as the market, the beta of the portfolio = 1

But beta of a portfolio is the weighted average of the beta of the individual assets of the portfolio

So, Weight of risk free asset x Beta of risk free asset + Weight of first stock x Beta of the first stock + Weight of third stock x Beta of the third stock = 1

So, 0.33 x 0 + 0.33 x 1.26 + 0.33 x X = 1

So, 0 + 0.4158 + 0.33 x X = 1

So, 0.33 x X = (1 - 0.4158)

So, X = 0.5842 / 0.33

= 1.77

So, beta of the third stock is 1.77