Simon is a portfolio manager at the Alpha-Beta investment company. He expects th

Question

Simon is a portfolio manager at the Alpha-Beta investment company. He expects the T-Bill rate to be 8% and the expected return on the market to be 18%. Simon lives in the CAPM world meaning that all CAPM assumptions and statements are valid. Would Simon hold a portfolio with the expected return of 15% and beta of 2? Please show your calculations and briefly comment on the result.

For the calculations, show your workings and formulas, not only the final result. Partial marks are available for correct steps and formulas.

Explanation / Answer

As per CAPM = Re = Rf + (Rm - Rf) Beta where, Re = Required rate of return Rf = Risk free interest rate Rm = Return on market portfolio With a beta of 2, Rf = 8% , Rm = 18% Re = 8 + ( 18 - 8 ) 2 Re = 28% ( Which is greater than Expected return of 15 % ) Since Required rate of return is higher than the expected rate of return Simon will not hold the portfolio as it is overpriced. Please hit the like button if the answer helped you else leave a comment for further clarification. Thank you! All the best!

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