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Suppose we have one risky asset Stock I and a risk-free asset. Stock I has an expected return of 25% and a beta of 2.
Suppose we have one risky asset Stock I and a risk-free asset. Stock I has an expected return of 25% and a beta of 2. The risk-free asset's return is 6%. (15 marks total) a. Calculate the expected returns and betas on portfolios with x% invested in Stock I and the rest invested in the risk-free asset, where x% = 0%, 25%, 75%, 100%, 125%, and 150%. (3 marks) b. What reward-to-risk ratio does Stock I offer? How do you interpret this ratio? (1.5 marks) c. Suppose we have a second risky asset, Stock J. Stock J has an expected return of 20% and a beta of 1.7. Calculate the expected returns and betas on portfolios with x% invested in Stock] and the rest invested in the risk-free asset, where x% = 0%, 25%, 75%, 100%, 125%, and 150%. (3 marks) d. What reward-to-risk ratio does Stock] offer? How do you interpret this ratio? (1.5 marks)
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