35. Assume the expected return on the market portfolio is 15% and its standard deviation is 12%. The risk-free rate is 5%. Denote the expected return and beta of securities on the Security Market Line
(SML) with () and β, respectively. Which statement is
TRUE?
A) The beta of a CML portfolio that contain 150% of the market
portfolio and 50% borrowed money
is 1.25.
B) The SML can be represented by the following equation:
C) The slope of the SML line is β.
D) A security with β equal to 1.45 has an expected return of 19.5%
Ans: D
D) A security with β equal to 1.45 has an expected return of 19.5%
The required rate of return R(e) is calculated by CAPM model
R(e) = r(f) + Beta*(R(m) - r(f))
R(m) is the market return =15%
r(f) is the risk-free rate = 5%
R(e) = 0.05+1.45*(0.15-0.05)
R(e) = 0.195= 19.5%
c) is incorrect since the slope of SML line is the market risk premium = Return on the market - Risk-free rate
a) is incorrect since Beta of the CML portfolio = 1.5*1-0.5*0 = 1.5
b) SML is represented by the equation = r(f) + Beta*(R(m) - r(f))
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