4. Portfolio Expected Return

4. Portfolio Expected Return
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an
expected return of 14 percent and Stock Y with an expected return of 11 percent. If your
goal is to create a portfolio with an expected return of 12.4 percent, how much money
will you invest in Stock X? In Stock Y?
7. Calculating Returns and standard Deviations
Based on the following information, calculate the expected return and standard deviation
for the two stocks.

17. Using CAPM
A stock has a beta of 1.15 and an expected return of 10.4 percent. A risk-free asset
currently earns 3.8 percent.
A. What is the expected return on a portfolio that is equally invested in the two
assets?
B. If a portfolio of the two assets has a beta of .7, what are the portfolio weights?
C. If a portfolio of the two assets has an expected return of 9 percent, what is its
beta?
D. If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights?
How do you interpret the weights for the two assets in this case? Explain.
29. SML
Suppose you observe the following situation:

A. Calculate the expected return on each stock.
B. Assuming the capital asset pricing model holds and stock As beta is greater than
stock Bs beta by .25, what is the expected market risk premium?