A student is wondering how much risk she must take to generate an acceptable ret
ID: 2712352 • Letter: A
Question
A student is wondering how much risk she must take to generate an acceptable return of her portfolio. The current risk free return is 5%. The return of the overall stock market is 16%. USE the CAPM to calculate how high the beta coefficient of Rosemary's portfolio would have to be to achieve each of the following expected portfolio returns shown on the left A-D.
E. ROSE is risk averse. What is the highest return she can expect if she is unwilling to take more risk than the average risk?
A 10% B 15% C 18% D 20% note Beta = 's r-Rf/rm-RfExplanation / Answer
= (r-Rf)÷(Rm-Rf)
A)
= (10%-5%)÷(16%-5%)
= 0.45
B)
= (15%-5%)÷(16%-5%)
= 0.91
C)
= (18%-5%)÷(16%-5%)
= 1.18
D)
= (20%-5%)÷(16%-5%)
= 1.36
E)
Average risk is market risk, i.e beta will be 1
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