Question

MCQ no need for explanation

ABC Corporation wishes to determine the required return on asset Z, which has a beta of 1.5. The risk-free rate of return is 7%; the return on the market portfolio of assets is 11%. What is the required rate of return using CAPM? *

a) 11%

b) 13%

c) 14%

d) 15%

e) None of the above

A portfolio comprises two securities and the expected return on them is 11% and 15% respectively. Determine return of portfolio if the first security constitutes 45% of total portfolio. *

a) 13%

b) 13.2%

c) 12.8%

d) 12.2%

e) None of the above

Answer 1

Answer to Question 1:

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 7.00% + 1.50 * (11.00% - 7.00%)
Required Return = 7.00% + 1.50 * 4.00%
Required Return = 13.00%

Answer to Question 2:

Weight of Security 1 = 0.45
Weight of Security 2 = 0.55

Expected Return of Portfolio = Weight of Security 1 * Expected Return of Security 1 + Weight of Security 2 * Expected Return of Security 2
Expected Return of Portfolio = 0.45 * 11.00% + 0.55 * 15.00%
Expected Return of Portfolio = 13.20%