Question: Question 4 (Chapter 13 10 points): Consider a portfolio invested in a stock and a risk-free asset. The expected return of the stock is 5.4%

Question 4 (Chapter 13 10 points): Consider a portfolio invested in a stock and a risk-free asset. The expected return of the stock is 5.4% and the risk-free rate is 2.1%. The beta of the stock is 0.8. a) What should be the portfolio weights if you wish your portfolio has a beta of 0.5. b) What should be the portfolio weights if you wish your portfolio has an expected return of 7%. Interpret the weights of the two assets.

Question 5 (Chapter 13 15 points): Consider the following information: State of Economy Probabilities Return on stock A Return on stock B Boom 0.3 -1% 10% Normal 0.5 5% 3% Bust 0.2 -7% -6% The expected market risk premium is 5.5% and the T-bill rate is 1.5%. a) Assuming that the CAPM holds, calculate the beta of Stock A and B. Suppose you invest $2000 in Stock A and $3000 in stock B. b) What is your portfolios expected return and beta? c) What is your portfolios standard deviation?

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