A stock has a beta of 1.2 and an expected return of 16%. The risk-free asset currently earns 5%.
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 0.75, what are the portfolio weights?
c) If a portfolio of the two assets has an expected return of 8%, what is its beta?
d) If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.