CMA Final · Strategic Financial Management · Portfolio Theory and Practice
An investor puts Rs 4 lakh in a share with beta 1.5, Rs 3 lakh in a share with beta 0.8 and Rs 3 lakh in treasury bills (beta zero). The risk-free rate is 6% and the market return is 12%. What is the portfolio's required return under CAPM?
The required return is 11.04%. The weighted portfolio beta is 0.6 plus 0.24 plus zero, equal to 0.84. Applying CAPM gives 6% plus 0.84 times the 6% market premium. Excluding the treasury bill holding would overstate beta and return.
- A11.04%Correct
- B13.20%
- C10.60%
- D12.00%
Explanation
Portfolio beta = 0.4×1.5 + 0.3×0.8 + 0.3×0 = 0.84. Required return = 6 + 0.84 × (12 − 6) = 11.04%. The 13.20% figure ignores the treasury bills (beta 1.2 for the risky part only).
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