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CMA Final · Strategic Financial Management · Asset Pricing Theories

A portfolio has 40% in a risk-free asset yielding 6% and 60% in the market portfolio, which has an expected return of 13%. Under CAPM, what are the portfolio's beta and expected return?

Beta is 0.6 and expected return is 10.2%. The risk-free asset has zero beta and the market has beta 1, so weighting by 60% gives 0.6. Return is 0.4 times 6% plus 0.6 times 13%, which equals 10.2%.

  1. ABeta 0.6; expected return 10.2%Correct
  2. BBeta 0.4; expected return 10.2%
  3. CBeta 0.6; expected return 9.8%
  4. DBeta 1.0; expected return 13.0%

Explanation

Beta = 0.4 x 0 + 0.6 x 1 = 0.6. Expected return = 0.4 x 6% + 0.6 x 13% = 2.4% + 7.8% = 10.2%. Check: 6% + 0.6 x 7% = 10.2%.

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