A portfolio consists of one risk asset and one risk-free asset. The risky asset has an expected return of 15% and a beta of 1.6. The risk free-rate asset has an expected return of 3%. If the portfolio beta is 1.1, what is the expected return of the portoflio?

A. 11.259

B. 13.20%

C. 19.20%

D. 6.00%

E. 6.75%

11.25%

Explanation:

In this question, we are asked to calculate the expected return of the portfolio.

portfolio beta = weighted average beta of assets

weight of risky asset * beta of asset = portfolio beta

weight of risky asset = 1.1/1.6

= 0.6875

Expected return = sum of (probability of asset * return of asset)

= 0.6875 * 15% + 0.3125 * 3%

= 11.25%