Suppose that borrowing is restricted so that the zero-beta version of the CAPM holds. The expected return on the market portfolio is 15%, and on the zero-beta portfolio it is 7%. What is the expected return on a portfolio with a beta of 0.7

Question

Jackrabbit

Business

2 February, 00:26

Suppose that borrowing is restricted so that the zero-beta version of the CAPM holds. The expected return on the market portfolio is 15%, and on the zero-beta portfolio it is 7%. What is the expected return on a portfolio with a beta of 0.7

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Answers (1)

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Sally · Answer 1

Expected return is 12.6%

Explanation:

Zero beta portfolio has no systematic risk. A zero beta portfolio has same expected rate of return as risk free rate. It does not effects with market change.

Using CAPM formula to calculate the expected return

Expected return = Risk free rate + Beta (Market rate - risk free rate)

As we know

Expected return on zero beta portfolio = risk free rate

Expected return = 7% + 0.7 (15% - 7%)

Expected return = 7% + 0.7 (8%)

Expected return = 7% + 5.6%

Expected return = 12.6%