Question

An investor expects a return of 18% on his portfolio with a beta of 1.25. If the expected market risk premium increases from 8% to 10%, what return should he now expect on the portfolio?

Multiple Choice

20.0%

20.5%

22.5%

26.0%

Answer 1

20.5%

Working:

As per Capital Asset Pricing Method,
Expected Return		=	Risk Free return +Beta*Risk Premium
0.18		=	Risk free return + 1.25*0.08
0.18		=	Risk free return +		0.100
Risk free return		=	0.18	-	0.100
Risk free return		=	0.08
After increase in risk premium,
Expected Return		=	Risk Free return +Beta*Risk Premium
		=	0.08	+	1.25*0.10
		=	20.5%