Question

Consider the following information: Portfolio Expected Return Beta Risk-free 5 % 0 Market 11.2 1.0 A 9.2 1.9 a. Calculate the return predicted by CAPM for a portfolio with a beta of 1.9. (Round your answer to 2 decimal places.) b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) c. If the simple CAPM is valid, is the situation above possible? Yes No

Answer 1

Answer:

The calculations are shown below:

Explanation:

The calculations are shown below:

a. The expected rate of return is  

Return = Risk free return + Beta × (Market return - risk free return)

= 5% + 1.9 ×  (11.20% - 5%)

= 5% + 11.78%

= 16.78%

b. Now the alpha is

Alpha = Actual rate of return - Expected rate of return

         = 9.2% - 16.78%

         = - 7.58%

c. No , the CAPM is not valid as the expected rate of return is more than the actual rate of return