Suppose that the S&P 500, with a beta of 1.0, has an expected return of 10% and

Question:

Suppose that the S&P 500, with a beta of 1.0, has an expected return of 10% and T-bills provide a risk-free return of 4%.

a. How would you construct a portfolio from these two assets with an expected return of 8%? Specifically what will be the weights in the S&P 500 versus T-bills?

b. How would you construct a portfolio from these two assets with a beta of .4?

c. Find the risk premiums of the portfolios in (a) and (b), and show that they are proportional to their betas.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...