Question

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: (Leave no cells blank - be certain to enter "0" wherever required.) What is the expected return on the market portfolio?

Answer 1

Answer: Expected Return = 12%

Explanation:

Yield on short-term government securities = 4%

The expected return required by the market for a portfolio with a beta of 1 = 12%

Now, according to the capital asset pricing model:

Expected Return = Risk-free rate + Beta × (expected return on the market - risk-free rate)

= 4 + 1 (12 - 4)

= 12%

∴ The  expected return on the market portfolio is 12%.