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Stock J has a beta of 1.23 and an expected return of 13.31 percent, while Stock K has a beta of...

Question:

Stock J has a beta of 1.23 and an expected return of 13.31 percent, while Stock K has a beta of .78 and an expected return of 10.25 percent. You want a portfolio with the same risk as the market.

(a)What is the portfolio weight of each stock?

(b)What is the expected return of your portfolio?

Expected Return on a Portfolio:

Any investor creates a portfolio with the intention to maximize the returns and diversify the risk. There are several stocks in a portfolio in some proportion. Each stock has its own expected return. The expected return on a portfolio is the weighted average return of all the stocks.

Answer and Explanation:

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a. The weight of stock J is 0.49 and the weight of stock K is 0.51

b. The expected return on portfolio is 11.75%

Part a:

  • beta of stock J = 1.23
  • bet...

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Using the Systematic Risk Principle & Portfolio Beta

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Chapter 12 / Lesson 3
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In this lesson, we'll discuss how investors must understand the systematic risk principle in their portfolio. We'll also explain how investors can measure and define the risk of their portfolios using betas.


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