Problem:
A stock has a beta of 1.70 and an expected return of 12 percent. A risk-free asset currently earns 2.8 percent.
Requirement:
Question 1: What is the expected return on a portfolio that is equally invested in the two assets?
Question 2: If a portfolio of the two assets has a beta of 1.02, what are the portfolio weights?
Question 3: If a portfolio of the two assets has an expected return of 10 percent, what is its beta?
Question 4: If a portfolio of the two assets has a beta of 3.40, what are the portfolio weights?
Note: Provide support for rationale.