Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expected return of 13.1%. Asset C has a beta of 0.50 and an expected return of 7.50%. The risk-free rate is 4% and the expected return on the market portfolio is 11%
If you wish to hold a portfolio consisting of assets B and C, and have a portfolio beta equal to 1.0, what proportion of the portfolio must be in asset C?
A) 0.375
B) 0.50
C) 0.625
D) 0.75
Answer: A
Explanation: A) βP = w ∗ βB + (1 - w) ∗ βC = 1.0 = w ∗ 1.3 + (1 - w) ∗ 0.50, w = 0.375.
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