NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)
A PMS stock portfolio has a beta of 1.2. The risk-free rate is 7% and the expected market return is 12%. According to the CAPM, what is the required return on the portfolio?
The required return is 13.0%. Under CAPM it equals the 7% risk-free rate plus beta of 1.2 times the 5% market risk premium, which is 6%, giving 13%.
- A13.0%Correct
- B12.0%
- C14.4%
- D11.4%
Explanation
CAPM: Rf + beta x (Rm - Rf) = 7 + 1.2 x 5 = 13%. Using 1.2 x 12 gives 14.4%, which ignores subtracting the risk-free rate from the premium. 12.0% ignores beta.
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