Answer:
Expected rate of return on the portfolio is 8.46
Explanation:
RR: Rate of return
Stock has [tex]RR_{1}[/tex] = 13.68, [tex]Beta_{1}[/tex] = 1.24
Risk-free asset has [tex]RR_{2}[/tex] = 2.8, [tex]Beta_{2}[/tex] = 0
(Yield can be considered equivalent to RR here)
Let [tex]x_{i}[/tex] be the weight of the assets.
Portfolio's beta is given by:
Beta = [tex]\sum{x_{i} \beta _{i}}[/tex] = 0.65
=> [tex]1.24x_{1} + 0x_{2} = 0.65[/tex]
=> [tex]x_{1}[/tex] = 0.52
=> [tex]x_{2}[/tex] = 1 - 0.52 = 0.48
Rate of return of the portfolio is given by
RR= [tex]\sum{x_{i}RR _{i}}[/tex] = (0.52 * 13.68) + (0.48 * 2.8) = 8.46
