Question

Stock J has a beta of 1.23 and an expected return of 13.25 percent, while Stock K has a beta of 8 and ar expected return of 11.40 percent. You want a portfolio with the same risk as the market

Requirement 1:
What is the portfolio weight of each stock? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
Stock J____
Stock K____
Requirement 2:
What is the expected return of your portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Expected return of the portfolio ____%

Answer 1

To create a portfolio with the same risk as the market, you need to calculate the portfolio weights and expected return for each stock. The portfolio weight of stock J is 0.1330 and the portfolio weight of stock K is 0.8670. The expected return of the portfolio is 11.6431%.

Step-by-step explanation:

In order to create a portfolio with the same risk as the market, we need to calculate the portfolio weights and expected return for each stock.

To find the portfolio weight of each stock, we can use the formula:

• Portfolio Weight = (Stock Beta / Total Beta)

In this case, the Total Beta is the sum of the Betas of the stocks in the market.

Let's calculate the weights:

• Stock J: 1.23 / (1.23 + 8) = 0.1330
• Stock K: 8 / (1.23 + 8) = 0.8670

To find the expected return of the portfolio, we can use the formula:

• Expected Return of the Portfolio = (Portfolio Weight * Expected Return of Stock J) + (Portfolio Weight * Expected Return of Stock K)

Substituting the values:

• Expected Return of the Portfolio = (0.1330 * 13.25%) + (0.8670 * 11.40%)

Calculating:

• Expected Return of the Portfolio = 1.7593% + 9.8838%
• Expected Return of the Portfolio = 11.6431%

So, the portfolio weight of Stock J is 0.1330 and the portfolio weight of Stock K is 0.8670. The expected return of the portfolio is 11.6431%.