Stock A has an expected return of 10 percent and a beta of 1.0. Stock B has a beta of 2.0. Portfolio P is a two-stock portfolio, where part of the portfolio is invested in Stock A and the other part is invested in Stock B. Assume that the risk-free rate is 5 percent, which required returns are determined by the CAPM, and that the market is in equilibrium so that expected returns equal required returns. Portfolio P has an expected return of 12 percent. What proportion of Portfolio P consists of Stock B?

Stock A has an expected return of 10 percent and a beta of 1.0. Stock B has a beta of 2.0. Portfolio P is a two-stock portfolio, where part of the portfolio is invested in Stock A and the other part is invested in Stock B. Assume that the risk-free rate is 5 percent, which required returns are determined by the CAPM, and that the market is in equilibrium so that expected returns equal required returns. Portfolio P has an expected return of 12 percent. What proportion of Portfolio P consists of Stock B?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

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.

Question

100%

Stock A has an expected return of 10 percent and a beta of 1.0. Stock
B has a beta of 2.0. Portfolio P is a two-stock portfolio, where part of
the portfolio is invested in Stock A and the other part is invested in
Stock B. Assume that the risk-free rate is 5 percent, which required
returns are determined by the CAPM, and that the market is in
equilibrium so that expected returns equal required returns. Portfolio
P has an expected return of 12 percent. What proportion of Portfolio
P consists of Stock B?

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