CMA Final · Strategic Financial Management · Asset Pricing Theories
The risk-free rate is 6% and the market return is 13%. A portfolio is made up of 40% in the risk-free asset, 30% in the market portfolio and 30% in a share with a beta of 1.8. What is the portfolio's expected return under the CAPM?
The correct portfolio return is 11.88%, from portfolio beta 0.84 and a 7% market premium on a 6% risk-free rate.
- A10.89%Correct
- B11.60%
- C9.60%
- D12.40%
Explanation
The share's return = 6% + 1.8 x 7% = 18.6%. Portfolio return = 0.4 x 6% + 0.3 x 13% + 0.3 x 18.6% = 2.4% + 3.9% + 5.58% = 11.88%. Check using beta: portfolio beta = 0 + 0.3 + 0.54 = 0.84; return = 6% + 0.84 x 7% = 11.88%. So the correct value is 11.88%, which is not among the listed figures.
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