A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 1.50, what is the weight of the stock in the portfolio?
A) 105%
B) 111%
C) 126%
D) 119%
E) 115%

Question

Quizplus · Accepted Answer

The weight of the stock in the portfolio can be calculated using the formula for the expected return on a portfolio and the concept of beta. The expected return on the portfolio can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Given the beta of the portfolio is 1.50, we can set up the equation with the known values and solve for the weight of the stock in the portfolio. The calculation involves finding the proportion of the portfolio's beta contributed by the stock's beta, leading to a weight of 115%.

A Stock Has a Beta of 1