An equity has a beta of 0.9 and an expected return of 9 per cent. A risk-free

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An equity has a beta of 0.9 and an expected return of 9 per cent. A risk-free asset currently earns 2 per cent.

(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 0.6, what are the portfolio weights?

(c) If a portfolio of the two assets has an expected return of 6 per cent, what is its beta?

(d) If a portfolio of the two assets has a beta of 1.50, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.

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Shameen Tahir

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