Question

q20

Your portfolio has a beta of 1.2. The risk-free rate is 5%, and the market portfolio return is 15%. What happens to your portfolio's expected return if the portfolio's beta increases to 1.8, risk-free rate increases to 6%, but the market portfolio return decreases to 10%.

Multiple Choice

• It increases from 13.2% to 17%.

• It decreases from 24% to 23%.

• It increases from 23% to 24%.

• It decreases from 17% to 13.2%.

q21.

f the EAR of interest is known to be 20% on a debt that has monthly payments, what is the APR?

Multiple Choice

• 17.51%

• 18.37%

• 15.19%

• 13.87%

Answer 1

Q20).

Given about a portfolio,

Beta = 1.2

risk free rate Rf = 5%

market return Rm = 15%

So, using CAPM model, expected return on portfolio is Rf + beta*(Rm - Rf)

=> Expected return on portfolio = 5 + 1.2*(15 - 5) = 17%

If Beta increases to 1.8

Risk free rate increases to Rf* = 6%

Market return decreases to Rm* = 10%

So, Expected return on portfolio = 6 + 1.8*(10 - 6) = 13.20%

So, Expected return on the portfolio decreases from 17% to 13.20%

Option D is correct

Q21). Given that

EAR = 20%

for monthly rate, APR = 12*(((1+EAR)^(1/12))-1) = 12*((1.2^(1/12))-1) = 18.37%

Option B is correct.