Question

Here are some characteristics of two portfolios, the market index, and the risk-free asset. Expected Return Beta Standard Deviation Portfolio A 11% 0.8 10% Portfolio B 14% 1.5 31% Market index 12% 1 20% T-bills 6% 0 0% Required: a-1. Calculate the return predicted by CAPM for a portfolio with a beta of 0.8. (Round your answer to 1 decimal place.) a-2. Calculate the return predicted by CAPM for a portfolio with a beta of 1.5. b. If instead you could invest only in bills and one of these portfolios, which would you choose

Answer 1

A. 1. Return predicted by capital asset pricing model for portfolio of .8

= (Risk free return+(Market return- risk free rate)B

B= Beta.

=(.06+(-12-06),8)

=(.06+,048)

= 10.80%.

A.2. Capital Asset pricing model return for portfolio of Beta of 1.5

=(.06+(-12-.06)1.5)

= 15.00%.

A.3. PORTFOLIO A- Portfolio A will be selected for investment because expected return is higher than required return and the portfolio is currently undervalued.

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