Unformatted text preview: 6. Given $1000, describe how to construct a portfolio with a beta of 2 comprised of JKL stock and the riskfree asset. What is the expected annual return for this portfolio? Solution: 1. Risk premium = 2.5 x 8 = 20%. Expected return = 5 + (2.5 x 8) = 25%. 2. 5/12 + 2.5 x (1  5/12)= 1.875% 3. JKL’s idiosyncratic return was 2  1.875 = .125%. 4. Systematic risk = 2.5 x 1.5 = 3.75. Idiosyncratic risk = 1.1. Total risk = sqrt(3 . 75 2 + 1 . 1 2 ) = 3.91%. 5. Between 25/12  (2 x 3.91) = 5.74% and 17/12 + (2 x 2.42) = 9.90%. 6. 2 = w * 2 . 5 + (1w ) * 0, solve for w. You should get w=.8. So, put $800 in JKL and 200 in the riskfree asset. The expected return for this portfolio should be 5+2*8 = 21%....
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 Fall '07
 DONCHEZ,RO
 Standard Deviation, Capital Asset Pricing Model, Corporate Finance, Deviation, JKL

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