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31 December, 18:07

Suppose that borrowing is restricted so that the zero-beta version of the CAPM holds. The expected return on the market portfolio is 17%, and on the zero-beta portfolio it is 8%. What is the expected return on a portfolio with a beta of 0.7? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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  1. 31 December, 18:16
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    The expected return on a portfolio is 14.30%

    Explanation:

    CAPM : It is used to described the risk of various types of securities which is invested to get a better return. Mainly it is deals in financial assets.

    For computing the expected rate of return of a portfolio, the following formula is used which is shown below:

    Under the Capital Asset Pricing Model, The expected rate of return is equals to

    = Risk free rate + Beta * (Market portfolio risk of return - risk free rate)

    = 8% + 0.7 * (17% - 8%)

    = 8% + 0.7 * 9%

    = 8% + 6.3%

    = 14.30%

    The risk free rate is also known as zero beta portfolio so we use the value in risk free rate also.

    Hence, the expected return on a portfolio is 14.30%
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