CMA Final · Strategic Financial Management · Asset Pricing Theories
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 portfolio is 60% in X and 40% in the risk-free asset. The portfolio's beta and required return under CAPM are:
Beta is 0.48 and required return is 8.88%. The risk-free asset has zero beta, so portfolio beta is 0.6 times 0.8. CAPM gives 6% plus 0.48 times the 6% premium, which is 8.88%. Stock X alone would need 10.8%.
- A0.48 and 8.88%Correct
- B0.48 and 10.8%
- C0.80 and 10.8%
- D0.32 and 7.92%
Explanation
Portfolio beta = 0.6 x 0.8 + 0.4 x 0 = 0.48. Required return = 6% + 0.48 x 6% = 6% + 2.88% = 8.88%. Check: 0.6 x (6% + 0.8x6% = 10.8%) + 0.4 x 6% = 6.48% + 2.4% = 8.88%. 10.8% is stock X's own return, ignoring the risk-free weighting.
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