Suppose that the S&P 500, with a beta of 1.0, has an expected return of...
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Finance
Suppose that the S&P 500, with a beta of 1.0, has an expected return of 10% and Treasury bills provide a risk-free return of 4%.
a. How would you construct a portfolio from these two assets with an expected return of 8%? Specifically, what will be the weights in the S&P 500 versus T-bills
b. How would you construct a portfolio from these two assets with a beta of 0.4?
c. Find the risk premiums of the portfolios in (a) and (b), and show that they are proportional to their betas.
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