Question

You have the option to invest in an S&P 500 Index fund that guarantees the average performance of stocks in the index. Assume that exactly 500 companies are in the economy and thus beta for this index fund is equal to 1, while the expected return of this index fund is 20%. An alternative risk-free asset has a return rate of 10%. Using the straight-line tool, draw the market line that plots the relationship between expected returns and beta.

Consider an alternative investment choice: a mutual fund whose beta is 0.6 and expected return is 4.50 percentage points higher than the market line. What is the expected return of this mutual fund?    % (Round to two decimals, if necessary.)

Answer 1