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 |

According to the
capital asset pricing model, what is the expected return on
Portfolio Z? |

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**

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