QUESTION 62 1. You invest $100

QUESTION 62:

Assume that market portfolio’s weight in Portfolio = x

And risk free rate (T-bills)’s weight in Portfolio = 1-x

Therefore,

Expected return of portfolio = x * Expected return of marketportfolio + (1-x) * Expected return of T-bill

Where,

Expected return of portfolio = 10%

Expected return of market portfolio = 12%

Expected return of T-bill = 5%

Now putting the values in above equation, we get

10% = x * 12% + (1-x) * 5%

Or 10% – 5% = (12% – 5%)* x

Or 5% = 7% * x

Or x = 5%/7% = 0.714 or 71.4%

Therefore the portfolio weight of market in your portfolio is0.714 or 71.4%

Therefore correct answer is option: 71.4%

QUESTION 63:

Beta of stock ABC = (Correlation coefficient between the marketreturns and Stock ABC return * Standard deviation of stock ABC) /standard deviation of the market return

= (0.6 * 40%)/ 20%

= 1.2

The beta of ABC’s stock is 1.2

Therefore correct answer is option: 1.2