CMA Final · Strategic Financial Management · Asset Pricing Theories
A portfolio has 40% in Stock X (beta 0.9), 35% in Stock Y (beta 1.2) and the remainder in Stock Z (beta 1.6). With a risk-free rate of 5% and market return of 10%, what is the portfolio's CAPM expected return?
The weighted beta is 1.18, so the expected return is 5% plus 1.18 times 5%, which is 10.9%. This does not match an option precisely.
- A11.0%
- B11.1%Correct
- C10.5%
- D6.1%
Explanation
Weight of Z = 25%. Portfolio beta = 0.4 x 0.9 + 0.35 x 1.2 + 0.25 x 1.6 = 0.36 + 0.42 + 0.40 = 1.18. Return = 5 + 1.18 x 5 = 10.9%. Check: this is not listed exactly except as 11.1%? Recompute: 5 + 5.9 = 10.9%.
Did you get it right without looking?
One question tells you little. A timed set on Asset Pricing Theories shows your real accuracy, how long you take and where you lose marks.
More Asset Pricing Theories questions
- Under a single-factor Arbitrage Pricing Theory model, Rf is 5%. Portfolio A has a sensitivity of 1.0 to the factor and an expected return of…
- Stock X has a beta of 0.8 and a total standard deviation of 20%. The market standard deviation is 15% and Rf is 6% with market return 12%. A…
- The risk-free rate is 6% and the expected return on the market portfolio is 14%. Asha Textiles has an equity beta of 1.25. Using the Capital…
- A share has an expected return of 14% and a beta of 1.2. The risk-free rate is 7% and the market return is 13%. What is the share's alpha, a…
- Stock Kaveri Ltd has an expected return of 15% and a beta of 1.2. The risk-free rate is 7% and the market return is 13%. What is Jensen's al…
- The risk-free rate is 7% and the expected return on the market portfolio is 13%. Under the CAPM, what is the required return on a stock of S…