Beta of two asset portfolio is 0.6, what are portfolio weights?

Question

This is a capm related question, one asset is risky asset and the other is risk free.

this is a part of question, where the data is: Stock beta-1.1, Er-15%, Rf-5%.
The beta of Rf is always zero.
Is the question asking to find the weights of the component assets?
How can the answer be found using capm equation?

Answer 1

o I believe this is really your question to answer.

Mostly it is a sleep factor question. If the market tanks What % of your risky asset could you lose and still sleep at night.

In a really Uggly Bear Market you can lose 50% of your Equity Position Sig 1987 or so...

So if you can feel good about your investment losing 40% lets say you can have 80% Risky and 20% Safe

Without knowing exactly what you are investing in, I cant comment much further because some Risky Investments are More Risky than others.

IE one individual stock can lose 100%....

One interesting thing about recoverable High Risk investments is they can be used to decrease the Risk in a Total Portfolio.

My example may not be so good but you should get the picture, the numbers will not be so accurate but the thought is with you .

You want to make 7.5% from a long term Portfolio

Maybe you use a Total Stock Fund giving you 10% long term ave per year and a Total Market Bond fund giving 5% per year. with a 1000 investment

50% stock @ 10% = 50
50% bond @ 5% =25

$75 in a $1000 portfolio = 7.5% your Target

Given in a very bad bull market you could lose 50% of you stock. so you have a short term loss potential of 25% on you portfolio.

Now Lets add Super Duper Micro Cap Index Fund(SDMCI)
that can make 30% per year but lose 75%

TBF 50% of 1000 @ 5% = 25
TSF 40% of 1000 @ 10% = 40
SDMCI 10% of 1000 @ 30% = 30

40 + 30 + 25 = 95 = 9.5% which is higher than your target

so adjusting portfolio ((without planning a good example))

you now have

TSM = 10% of 1000 @ 10% =10
SDMCI =10% of 1000 @ 30% =30
TBM = 80% of 1000 @ 5% = 40

40 + 30 + 10 = 80 = 8% a 1/2% increase of out original 50/50 Portfolio

but if a Wicked Bear Market comes along you can lose
70% of the SDMCI which is 7% of the total
50% of the TSM which is 5% of the total

you can lose 12% of you total in an extreme Bear Market compared to 50% before.

By carefully picking your """"RISKY"""" Investment so it is long term and recoverable you have added a very risky investment to your portfolio ... Increasing the yield and decreased the risk(ToTal Portfolio Risk) by adjusting the amount of your safe investment.

Now the numbers for the risky investment were hypothetical to push through my point .

You might use Vanguards Small Cap Value Fund Might have a 12-13% Long term Gain.

Also there are many kinds of Risk that are available to take a piece of you investment.

Market Risk - The Main one
Inflation Risk- Why you should have some stocks Highly diversified
Manager Risk - Mostly Mutual Fund - Either a change in Management or Change in what the Mutual fund is supposed to do thereby changing you Portfolio Composition.((Why I like Index Funds))

and Many others..... I mean Many others---

There have been several conversations on Diehards.org anyone interested in Risk can go there and be wizdomized.

Without specifics I just went wayyyyyy over my .02$ worth.
I'm not sure I answered the question you asked..

You might want to peek at Larry Swedroe's book He talks about PMT(Portfolio Management Theory) and adding different Asset Classes to Increase Yield and Decreasing overall risk. A pretty easy read.

Good Luck Gerry..

Answer 2

The beta of a portfolio is a market-weighted average of the betas of the assets in the portfolio.

Let Wx and Wr be the weights of the risky asset and the risk free asset
Let Bp, Bx and Br be the betas of the portfolio, risky asset and risk free asset.

The beta of the risk free asset is zero.

Therefore,

Bp = Wx*Bx +Wr*Br
Bp = Wx*Bx + 0
Bp = Wx*Bx
Wx = Bp/Bx

So -- the weight of the risk asset is 0.6/Bx

The weight of the risk free asset is 1-Wx

If the risky asset is the market porfolio, then the weight is 0.60. Otherwise, you need the beta of the risky asset.

Answer 3

May someone please assist with this question:
The returns on stocks A and B are perfectly negatively correlated ( ). Stock A has an expected return of 21 % and a standard deviation of return of 40%. Stock B has a standard deviation of return of 20%. The risk-free rate of interest is 11 %. What must be the expected return to stock B?

Answer 4

enable Portfolio A & B = one hundred,000 and 12% return = 12,000 then B = one hundred,000 - A 19percentA + 8percentB = 12,000; 19percentA + 8%(one hundred,000 - A) = 12,000; 19percentA + 8,000 - 8percentA = 12,000; 11percentA = 4,000; A = 4,000 / .11 = 36,364. A = 36,364 and B = sixty 3,636, entire one hundred,000 Weights: A = 36.4%, B = sixty 3.6% information - Portfolio one hundred,000, 12% return 12,000 A - 36,364 @ 19% = 6,909 B - sixty 3,636 @...8% = 5,091 Totals - one hundred,000 / 12,000

Answer 5

trade in a cappuccino for a regular a cup of joe

Answer 6

avoid eating while rading listening songs and watching tv at your home or keep by kepping your hands busy

Answer 7

no game necessary do 780 jumping jacks

Answer 8

don t drink your calories