Suppose the risk-free rate is 3.2 percent and the market portfolio has an expect

Question

Suppose the risk-free rate is 3.2 percent and the market portfolio has an expected return of 9.9 percent. The market portfolio has a variance of .0282. Portfolio Z has a correlation coefficient with the market of .18 and a variance of .3185

According to the capital asset pricing model, what is the expected return on Portfolio Z? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Suppose the risk-free rate is 3.2 percent and the market portfolio has an expected return of 9.9 percent. The market portfolio has a variance of .0282. Portfolio Z has a correlation coefficient with the market of .18 and a variance of .3185

Explanation / Answer

Beta = Correlation x (Variance of Z)^0.5 / (Variance of Market)^0.5

Beta = 0.18 x (0.3185)^0.5 / (0.0282)^0.5

Beta = 0.604927

.

CAPM equation:

.

Expected return = Risk free rate + Beta x (Market return - Risk free rate)

Expected return = 3.2% + 0.604927 x (9.9% - 3.2%)

Expected return = 7.25%

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