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Suppose that the S&P 500, with a beta of 1.0 has an expected return of 10% and T-bills provide a risk-free return of 4%.

a. How would you construct a portfoilo from these two assets with an expected return of 8%? Specificaly, what will be the weights in the S&P 500 verses T-bill?

b. How would you construct a portfolio from these two assets with a beta of .4?

c. Find the risk premium of the portfolio in (a) and (b) and show that they are proportional to their betas.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92084543

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