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CMA Final · Strategic Financial Management · Asset Pricing Theories

The risk-free rate is 7% and the market return is 12%. A portfolio is invested 40% in a risk-free asset and 60% in a stock with beta 1.5. What is the portfolio beta and its CAPM required return?

The portfolio beta is 0.90, as the risk-free asset has zero beta and the stock contributes 0.6 times 1.5. The CAPM required return is therefore 7% plus 0.90 times 5%, which equals 11.5%.

  1. ABeta 0.90; required return 11.5%Correct
  2. BBeta 1.50; required return 14.5%
  3. CBeta 0.60; required return 10.0%
  4. DBeta 0.90; required return 12.0%

Explanation

Portfolio beta = 0.4 x 0 + 0.6 x 1.5 = 0.90. Required return = 7% + 0.90 x 5% = 11.5%. Option with 12.0% wrongly equates the portfolio return with the market return, and 1.50 ignores the risk-free weight.

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