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24 September, 18:19

Consider the following information: Portfolio Expected Return Beta Risk-free 5 % 0 Market 11.2 1.0 A 9.2 1.9 a. Calculate the return predicted by CAPM for a portfolio with a beta of 1.9. (Round your answer to 2 decimal places.) b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) c. If the simple CAPM is valid, is the situation above possible? Yes No

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  1. 24 September, 18:34
    0
    The calculations are shown below:

    Explanation:

    The calculations are shown below:

    a. The expected rate of return is

    Return = Risk free return + Beta * (Market return - risk free return)

    = 5% + 1.9 * (11.20% - 5%)

    = 5% + 11.78%

    = 16.78%

    b. Now the alpha is

    Alpha = Actual rate of return - Expected rate of return

    = 9.2% - 16.78%

    = - 7.58%

    c. No, the CAPM is not valid as the expected rate of return is more than the actual rate of return
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Home » Business » Consider the following information: Portfolio Expected Return Beta Risk-free 5 % 0 Market 11.2 1.0 A 9.2 1.9 a. Calculate the return predicted by CAPM for a portfolio with a beta of 1.9. (Round your answer to 2 decimal places.) b.
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