Expected Return and Stock Portfolios

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  Stock A has an expected return of 20%, and Stock B has an expected return of 4%. However, the risk of Stock A as measured by its variance is 3 times that of Stock B.

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• Investment Decision Questions

  Q4 Assume that both X and Y are two well-diversified portfolios, and that the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected return of 9.5% and a beta of 0.25.

• In any of the possible two-stock scenarios, the weight of each stock in the portfolio will be 50%. The three possible portfolio combinations are AB, AC, and BC.

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• Returns on portfolios/stock

  Suppose the expected return on the market portfolio is 13.8 percent and the risk-free rate is 6.4 percent. Solomon Inc. stock has a beta of 1.2. Assume the capital-asset-pricing model holds. a. What is the expected return on Solomon's stock? b.