Equity has a beta of 1.35 and an expected return of 16 percent. A risk-free asset currently earns 4.8 percent. (a) What is the expected return on a portfolio that is equally invested in the two assets? (b) If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights? (c) If a portfolio of the two assets has an expected return of 8 percent, what is its beta? (d) If a portfolio of the two assets has a beta of 2.70, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Equity has a beta of 1.35 and an expected return of 16 percent. A risk-free asset currently earns 4.8 percent.
(a) What is the expected return on a portfolio that is equally invested in the two assets?
(b) If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights?
(c) If a portfolio of the two assets has an expected return of 8 percent, what is its beta?
(d) If a portfolio of the two assets has a beta of 2.70, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain
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