Stock XYZ has a beta of 1.2 and an expected return of 14%; the risk-free asset (T-bills) currently earns 4%. If the portfolio of the two assets has a beta of 1.6, what are the portfolio weights?
A) risk-free asset = 33%, stock XYZ = 67%
B) risk-free asset = 0%, stock XYZ = 100%
C) risk-free asset = 133%, stock XYZ = -33%
D) risk-free asset = -33%, stock XYZ = 133%

Question

Quizplus · Accepted Answer

The portfolio beta is a weighted average of the betas of the individual assets. To achieve a portfolio beta of 1.6 with a risk-free asset (beta = 0) and stock XYZ (beta = 1.2), the weight of stock XYZ must be greater than 100%, indicating leverage.

Stock XYZ Has a Beta of 1