Question

4" (15 points) Suppose the risk-free rate is 6.3% and the market portfolio has an expected rate of return of 14.8%. The market portfolio has a variance of 0.0121. Portfolio Z has a correlation coefficient with the market of 0.45 and a variance of 0.0169. According to CAPM, what is the expected rate of return on portfolio Z?

Answer 1

CAPM Formula

R_e = R_f + $\beta$ * (R_m - R_f)

R_e = Expected Return of Return = ?

R_f = Risk-free rate = 6.3%

$\beta$ = Beta = ?

R_m = Market Return = 14.8%

$\beta$ = Correlation (portfolio, market) * ($\sigma$_portfolio / $\sigma$_market) = ?

CAPM Formula
Re = Rf + β*(Rm-Rf)
Re = Expected Rate of Return	?
Rf = Risk-free Rate	6.30%
β = Portfolio Beta	?
Rm = Market Portfolio Return	14.80%
β = Correlation(portfolio,market)*(σ,portfolio/σ,market)
β = 0.45*((√0.0169)/(√0.0121))	0.531818
σ = √(variance)
Re = 6.3% + 0.531818*(14.8%-6.3%)
10.82%	Ans