Question

A stock has a beta of 1.3 and an expected return of 12.8 percent. a risk-free asset currently earns 4.3 percent.

a. what is the expected return on a portfolio that is equally invested in the two assets

Answer 1

The expected return on this portfolio will be given by:
E[P]=Rf+(E[Rm]-Rf)β
Where:
Rf=Risk Free interest rate
Rm=Return on the market portfolio
β= Market Beta
The return on our portfolio will be:
E[p]=0.043+(0.128-0.043)0.013
=0.043+0.085*0.013
=0.044105
=4.4105%