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    Risk Free Return Asset Finance Quiz

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    aoi03
    The document presents a table to calculate the expected return and beta of portfolios with varying percentages of Asset W and a risk-free asset. It then asks for the slope of the security market line based on the given expected return and beta of Asset W. The slope is calculated as the difference between Asset W's expected return and the risk-free rate, divided by Asset W's beta, which equals 7.29%.

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    Risk Free Return Asset Finance Quiz

    Uploaded by

    aoi03
    47 views1 page
    The document presents a table to calculate the expected return and beta of portfolios with varying percentages of Asset W and a risk-free asset. It then asks for the slope of the security market line based on the given expected return and beta of Asset W. The slope is calculated as the difference between Asset W's expected return and the risk-free rate, divided by Asset W's beta, which equals 7.29%.

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    The document presents a table to calculate the expected return and beta of portfolios with varying percentages of Asset W and a risk-free asset. It then asks for the slope of the security market line based on the given expected return and beta of Asset W. The slope is calculated as the difference between Asset W's expected return and the risk-free rate, divided by Asset W's beta, which equals 7.29%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    47 views1 page

    Risk Free Return Asset Finance Quiz

    Uploaded by

    aoi03
    The document presents a table to calculate the expected return and beta of portfolios with varying percentages of Asset W and a risk-free asset. It then asks for the slope of the security market line based on the given expected return and beta of Asset W. The slope is calculated as the difference between Asset W's expected return and the risk-free rate, divided by Asset W's beta, which equals 7.29%.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    Question 4

    Asset W has an expected return of 8.8 percent and a beta of .85. If the risk-free rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Leave no cells
    blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your expected return answers as a percent rounded to 2 decimal places, e.g., 32.16,
    and beta answers to 3 decimal places, e.g., 32.161.)

    Percentage of Portfolio in Asset


    Porfolio Expected Return Portfolio Beta
    W
    0 100% 2.6 % 0
    25 75 4.15 21.25 0.213
    50 50 5.7 42.5 0.425
    75 25 7.25 63.75 0.638
    100 0 8.8 85 0.850
    125 -25 10.35 106.25 1.063
    150 -50 11.9 127.5 1.275

    Expected return = 0.088


    Beta = 0.85
    Risk-free return = 0.025

    If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations and enter your answer as a
    percent rounded to 2 decimal places, e.g., 32.16.)

    Slope of SML = (8.80-2.60)/0.85


    Slope of SML = 7.29%

    Slope of the line 7.29 %

    Explanation

    Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

    First, we need to find the beta of the portfolio. The beta of the risk-free asset is zero, and the weight of the risk-free asset is one minus the weight of the stock, so the beta of the portfolio is:

    βP = XW(.85) + (1 – XW)(0) = .85XW

    So, to find the beta of the portfolio for any weight of the stock, we multiply the weight of the stock times its beta.

    Even though we are solving for the beta and expected return of a portfolio of one stock and the risk-free asset for different portfolio weights, we are really solving for the SML. Any combination of this stock, and the risk-free asset will fall on the SML. For that matter, a portfolio of any stock and the risk-free asset, or any portfolio of stocks, will fall on the SML. We know the slope of the SML line is the market risk premium, so using the CAPM and the information concerning this stock, the

    E(RW) = .088 = .026 + MRP(.85)


    MRP = .062/.85
    MRP = .0729, or 7.29%

    So, now we know the CAPM equation for any stock is:

    E(RP) = .026 + .0729βP

    The slope of the SML is equal to the market risk premium, which is .0729. Using these equations to fill in the table, we get the following results:

    XW E(RP) ßP
    0% 2.60% 0
    25 4.15 0.213
    50 5.7 0.425
    75 7.25 0.638
    100 8.8 0.85
    125 10.35 1.063
    150 11.9 1.275

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