NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
A risk-free rate is 6%, the expected market return is 12% and a stock has a beta of 1.5. Using CAPM, what is the required return on the stock?
The required return is 15%. CAPM gives risk-free rate plus beta times market risk premium: 6% + 1.5 x (12% - 6%) = 6% + 9% = 15%. The stock's beta of 1.5 magnifies the 6% market premium to 9%.
- A15%Correct
- B18%
- C9%
- D16.5%
Explanation
Required return = 6% + 1.5 x (12% - 6%) = 6% + 9% = 15%. The 18% option wrongly multiplies beta by the market return (1.5 x 12%). The 9% option gives only the risk premium, omitting the risk-free rate.
Did you get it right without looking?
One question tells you little. A timed set on Introduction to Modern Portfolio Theory shows your real accuracy, how long you take and where you lose marks.
More Introduction to Modern Portfolio Theory questions
- A portfolio manager's portfolio earned 14% in a year with a standard deviation of 20% and a beta of 1.2. The risk-free rate was 6%. What is …
- In the Capital Asset Pricing Model, which risk is rewarded with a risk premium for an investor who holds a well-diversified portfolio?
- Portfolio A has a return of 15%, standard deviation of 20% and beta of 1.2. The risk-free rate is 6%. What is the Sharpe ratio of Portfolio …
- Which statement about the efficient frontier in Markowitz portfolio theory is correct?
- A portfolio manager's portfolio earned 15% in a year with a standard deviation of 10% and a beta of 1.2. The risk-free rate was 6%. What are…
- Rohit holds two assets in a portfolio: Asset A with weight 60% and expected return 10%, and Asset B with weight 40% and expected return 15%.…