Consider the following information: Expected Return Portfolio Risk-free Market B

Question

Consider the following information: Expected Return Portfolio Risk-free Market Beta 11% 16.0 12.0 1.0 0.7 a. Calculate the expected return of portfolio A with a beta of 0.7. (Round your answer to 2 decimal places.) Expected return 4 % b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Alpha c. If the simple CAPM is valid, is the above situation possible? O Yes O No References eBook &Resources; Worksheet Learning Objective: 07-01 Use the implications of capital market theory to estimate security risk premiums Type here to search

Explanation / Answer

1.

Expected return=risk free+beta*(market return-risk free)=11%+0.7*(16%-11%)=14.5%

2.

Alpha of Portfolio A=Expected return-Required Return according to CAPM=12%-14.5%=-2.5%

3.

No

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