Stock J has a beta of 1.17 and an expected return of 14.4 per cent,while Stock K has a beta of 0.68 and an expected return of 7.6 per cent.You want a portfolio with the same risk as the market.What is the expected return of your portfolio?
A)12.04 per cent
B)13.13 per cent
C)10.67 per cent
D)11.62 per cent
E)11.18 per cent

Question

Quizplus · Accepted Answer

The correct answer is A because the expected return of a portfolio is equal to the weighted average of the expected returns of the individual stocks in the portfolio, with the weights being the proportions of the portfolio invested in each stock. In this case, the portfolio has the same risk as the market, so the weights should be proportional to the betas of the stocks. The beta of the portfolio is equal to the weighted average of the betas of the individual stocks, so the weight of Stock J in the portfolio should be 1.17 / (1.17 + 0.68) = 0.63, and the weight of Stock K in the portfolio should be 0.68 / (1.17 + 0.68) = 0.37. The expected return of the portfolio is then equal to 0.63 * 14.4% + 0.37 * 7.6% = 12.04%.

Stock J Has a Beta of 1