I got two different answers for #2. Which is correct, WorkA or WorkB? If neither, please solve and show work.

1. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.32 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio? Show your work.

Answer:

Market Beta=1

1 = 1/3*0 + 1/3*1.32 + 1/3*Beta of other stock

1 = 0 + .44 + 1/3*Beta of other stock

1 - .44 = 1/3*Beta of other stock

.56 = 1/3*Beta of other stock

Beta of other stock = .56*3

Beta of other stock = 1.68

2. Given the beta calculated in question 1, if stock B has an expected return of 13 percent and the risk-free rate is 4%, what must the expected return on the market be? Show your work.

WorkA

This question can be answered using the Capital Asset Pricing Model (CAPM) equation:- Expected return of Stock B= Risk free rate + Beta( Market return- risk free rate) 0.13 = 0.04 +1.68( market return - 0.04) 0.13 = 0.04 +1.68*market return -1.68*0.04 0.13 = 0.04 +1.68*market return - 0.062 0.13+0.0620.04 =1.68* market return 0.152(1.68= market return market return = 0.0904 Hence Market Return = 9.04%