a. The expected return on the market portfolio is 16 percent, and the return on

Question

a. The expected return on the market portfolio is 16 percent, and the return on the risk-free security is 5 percent. What is the expected return on a portfolio with a beta equal to 0.5? (Round answer to 1 decimal place, e.g. 17.5%.)

Expected return%=

b. In February 2011 the risk-free rate was 4.40 percent, the market risk premium was 7.00 percent, and the beta for Dell stock was 1.70. What is the expected return that was consistent with the systematic risk associated with the returns on Dell stock? (Round answer to 2 decimal places, e.g. 17.54%.)

Expected return%=

c. The market risk premium is 9.00 percent, and the risk-free rate is 4.10 percent. If the expected return on a bond is 10.30 percent, what is its beta? (Round answer to 2 decimal places, e.g. 15.25.)

Beta=?

Explanation / Answer

As per CAPM expected return = Risk free rate + (Market risk premium * Beta)

Market risk premium = Return from market - Risk free rate

A.

Market risk premium = 16-5 = 11%

Expected return = 5+(11*0.5) = 10.5%

B.

Expected return = 4.4 + (7*1.7) = 16.3%

C.

Here, expected return is given and we need to find Beta

Therefore,

10.30 = 4.10 + (9* Beta)

Beta = (10.3-4.1)/9 = 0.68888889 I.e. 0.69

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