A friend says that she expects to earn 14.45% on her portfolio with a beta of 1.8. You have a two-asset portfolio including stock X and the risk-free security. Stock X is on the SML (youre not sure about your friends portfolio) with an expected return of 10.65% and a beta of 1.1. The expected return on the risk-free security is 3.5%. You construct a portfolio (with X and the risk-free asset) to match your friend's return. What is the beta of your portfolio and is your friend getting a good or bad deal?

Responses

beta = 1.53; friend is getting a bad deal

beta = 1.68; friend is getting a good deal

beta = 1.53; friend is getting a good deal

beta = 1.68; friend is getting a bad deal