Stock J has a beta of 1.3 and an expected return of 13.66 percent, while Stock K has a beta of...

Question:

Stock J has a beta of 1.3 and an expected return of 13.66 percent, while Stock K has a beta of 0.85 and an expected return of 10.6 percent. You want a portfolio with the same risk as the market.

What is the portfolio weight of each stock?

What is the expected return of your portfolio?

Portfolio Beta:

Portfolio beta is given as the weighted average of all the betas of the individual stocks. It is calculated as the sum total of individual betas multiplied by the individual weights in the portfolio.

Answer and Explanation:

Market Portfolio Beta = 1

Let the weight of Stock J be a

Thus,

Weight of Stock K is 1 - a

or,

a x 1.3 + (1 - a) x 0.85 = 1

or,

a = 0.33333 =...

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Portfolio Weight, Return & Variance: Definition & Examples

from Finance 101: Principles of Finance

Chapter 12 / Lesson 1
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