Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected re

Question

4 years ago

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Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected re

turn required by the market for a portfolio with a beta of 1 is 10.0%. According to the capital asset pricing model, what is the expected return on the market portfolio?

Business

1 answer:

iogann1982 [59] · Answer 1 · 2021-11-12T08:05:23+03:00

Answer: 10%

Explanation:

The Capital Asset Pricing Model or CAPM for short can be used to calculate expected return in the following manner,

Expected return = Rf+B(Rm-Rf)

Rf = Risk free rate

B = Beta

Rm= Market return.

Plugging the figures in we have

Expected return = Rf+B(Rm-Rf)

= 0.04 + 1(0.1 - 0.04)

= 0.1

= 10%