Question

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%.

A)
   

Portfolio	Expected Return			Beta
A		11​	%		1.1​
Market		11​	%		1.0​

B)
   

Portfolio	Expected Return			Standard Deviation
A		14​	%		11​	%
Market		9​	%		19​	%

C)
   

Portfolio	Expected Return			Beta
A		14​	%		1.1​
Market		9​	%		1.0​

D)
   

Portfolio	Expected Return			Beta
A		17.6​	%		2.1​
Market		11​	%		1.0​

		Option A
		Option B
		Option C
		Option D

Answer 1

A) As Per CAPM Expected Return =Risk free rate+Beta*(Market Return -Risk free Rate) =5%+1.1*(11%-5%) =11.60%
(Portfolio is not correctly Priced)

B) Standard Deviation alone cannot determine expected return using CAPM

C) As Per CAPM Expected Return =Risk free rate+Beta*(Market Return -Risk free Rate) =5%+1.1*(9%-5%) =9.40%
(Portfolio is not correctly Priced)

D) As Per CAPM Expected Return =Risk free rate+Beta*(Market Return -Risk free Rate) =5%+2.1*(11%-5%) =17.60%
Required Rate and Expected Return of Portfolio are Same
(Portfolio is correctly Priced)

Option D is corrrect option