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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Business

Max Mcgrath

12 November, 14:57

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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Answers (1)

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Miss Piggy · Answer 1

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