Both assets B and C plot on the SML.Asset B has a beta of 1.3 and an expected return of 13.1%.Asset C has a beta of 0.50 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 1.0,what proportion of the portfolio must be in asset C?
A)0.375
B)0.50
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: β_portfolio = w_B * β_B + w_C * β_C. Set β_portfolio to 1.0, β_B to 1.3, and β_C to 0.5. Solving 1.0 = (1-w_C)*1.3 + w_C*0.5 gives w_C = 0.375.

Both Assets B and C Plot on the SML