Both assets B and C plot on the SML.Asset B has a beta of 1.5 and an expected return of 13.1%.Asset C has a beta of 0.60 and an expected return of 7.50%.The risk-free rate is 4% and the expected return on the market portfolio is 11%.If you wish to hold a portfolio consisting of assets B and C,and have a portfolio beta equal to 1.1,what proportion of the portfolio must be in asset C?
A)0.375
B)0.444
C)0.625
D)0.75

Question

Quizplus · Accepted Answer

To find the proportion of the portfolio in asset C, use the formula for portfolio beta: βp = wB * βB + wC * βC. Given βp = 1.1, βB = 1.5, and βC = 0.6, solve for wC: 1.1 = (1 - wC) * 1.5 + wC * 0.6. Solving gives wC = 0.375.

Both Assets B and C Plot on the SML