Suppose that borrowing is restricted so that the zero-beta version of the CAPM holds. The expected return on the market portfoli

Question

3 years ago

7

o is 14%, and on the zero-beta portfolio it is 7%. What is the expected return on a portfolio with a beta of 0.5?

1 answer:

Delvig [45] · Answer 1 · 2022-05-30T05:19:38+03:00

Answer:

10.5%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

where,

Risk free rate of return = 7%

Market rate of return = 14%

And, the beta is 0.5

So the expected return is

= 7% + 0.5 × (14% - 7%)

= 7% + 0.5 × 7%

= 7% + 3.5%

= 10.5%