Suppose we have one risky asset Stock I and a risk-free asset. Stock I has an expected return of 25% and a beta of 2. The risk-free asset’s return is 6%.

a. Calculate the expected returns and betas on portfolios with x% invested in Stock I and the rest invested in the risk-free asset, where x% = 0%, 25%, 75%, 100%, 125%, and 150%.

b. What reward-to-risk ratio does Stock I offer? How do you interpret this ratio?

c. Suppose we have a second risky asset, Stock J. Stock J has an expected return of 20% and a beta of 1.7. Calculate the expected returns and betas on portfolios with x% invested in Stock J and the rest invested in the risk-free asset, where x% = 0%, 25%, 75%, 100%, 125%, and 150%.

d. What reward-to-risk ratio does Stock J offer? How do you interpret this ratio?

Answer rating: 100% (QA)

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