Question

Suppose the risk-free rate is 4.8 percent and the market portfolio has an expected return of 11.5 percent. The market portfolio has a variance of .0442. Portfolio Z has a correlation coefficient with the market of .34 and a variance of .3345

  

According to the capital asset pricing model, what is the expected return on Portfolio Z? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

HI,

Here risk free rate rf = 4.8%

market return rm= 11.5%

according to Capital asset pricing model

expected return = rf+beta*(rm-rf)

and beta = correlation *standard deviation of portfolio/ standard deviation of market

and standard deviation of portfolio z = squareroot(variance)

=squareroot(0.3345) = 0.578

standard deviation of market = squareroot(0.0442) = 0.21

so beta = 0.34*0.578/0.21 = 0.935

Then expected return of portfolio = 4.8+0.935*(11.5-4.8)

=11.07%

Thanks