Question

Consider the following information:

Portfolio	Expected Return		Beta
Risk-free	10	%	0
Market	10.8	%	1.0
A	8.8	&	0.6

a. Calculate the expected return of portfolio A with a beta of 0.6. (Round your answer to 2 decimal places.)

b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

c. If the simple CAPM is valid, is the above situation possible?

y/n

Answer 1

a.expected return of portfolio A with beta of 0.60.

=> risk free rate + beta*(market return - risk free rate)

=>10%+ 0.60*(10.8-10)

=>10.48%.

b.alpha of portfolio = expected return - return as per capm

=>8.8-10.48

=>1.68%.

c.No.

Since return as per CAPM and expected return vary, it can be said that CAPM is not valid.