Portfolio Risk and Retur n. Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13 percent and T-bills provide a risk-free return of 5 percent.

What would be the expected return and beta of portfolios constructed from these two as- sets with weights in the S&P 500 of (i) 0; (ii) .25;

Solution

1. The expected return of the portfolio is equal to the weighted average of the returns on S&P 500 and T-bills. Similarly, the beta of the portfolio is equal to the weighted average of the beta of the S&P i.e. 1.0 and the beta of T-bills i.e. 0.E (r) = Rf + β (Rm – Rf)…………………………………………..

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