Compute the expected return of portfolio on the facts narrated.
A stock has a beta of 0.8 and an expected return of 13 percent. A risk-free asset currently earns 4 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 0.6, what are the portfolio weights?
(c) If a portfolio of the two assets has an expected return of 11 percent, what is its beta?
(d) If a portfolio of the two assets has a beta of 1.60, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.