Question

Answer ques wer questions 13 bosed upon the folowing information Asset A (not a portfolo) has a beta of 1.7. Asset B (nota port Q13. Ithe Capital Asst Ping Model iscoret the A The required retum on aset cannot be less than the regua portfolio) has a beta of 1.2 folio) has a beta of 1.2. B. b. The standard deviation of retums of asset A cannot be lens tha deviation of returns of asset B be less than the than the standard . The required on asset A is equal to the required retum on aset h None of the above. d.

Answer 1

If Capital Assets Pricing Model (CAPM) holds, we have following formula to calculate asset's required return -

Required rate of Return of the asset = risk free rate + beta of asset* (Expected market return – risk free rate)

Where Risk free rate and Expected Market return is common for Asset A and Asset B

The beta of the asset A (1.7) is more than the beta of asset B (1.2); the required return on Asset A will be more than the required return on Asset B if expected market return is more than the risk free rate but the required return on Asset A will be less than the required return on Asset B if expected market return is less than the risk free rate.

Therefore correct answer is option a. None of the above