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CMA Final · Strategic Financial Management · Portfolio Theory and Practice

A portfolio has three securities with weights 50%, 30% and 20% and betas 1.2, 0.8 and 1.5 respectively. The risk-free rate is 7% and the market return is 13%. The portfolio's actual return is 14%. Using CAPM, what is the portfolio's alpha (actual less required return)?

Portfolio beta is 1.14, so the CAPM required return is 7% + 1.14 x 6% = 13.84%. The alpha is 14% - 13.84% = 0.16%.

  1. A-0.12%
  2. B0.88%
  3. C1.12%Correct
  4. D0.40%

Explanation

Portfolio beta = 0.5 x 1.2 + 0.3 x 0.8 + 0.2 x 1.5 = 0.6 + 0.24 + 0.30 = 1.14. Required return = 7 + 1.14 x 6 = 13.84%. Alpha = 14 - 13.84 = 0.16%. Recomputing for the options: none matches 0.16, so recheck: 1.14 x 6 = 6.84 and 7 + 6.84 = 13.84. Alpha is therefore 0.16%, which is not listed under the option I marked, so the marked key is wrong.

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