If the simple CAPM is valid, is the situation detailed below possible? Explain in a few...
-
If the simple CAPM is valid, is the situation detailed below possible? Explain in a few short sentences
|
Portfolio |
Expected Return |
Beta |
|
Risk-free |
10% |
0 |
|
Market |
16% |
1 |
|
A |
19% |
1.5 |
|
B |
22% |
2 |
Homework Answers
Expected return on A = Risk free rate + Beta*(Market return - Risk free rate)
= 10%+ 1.5*(16%-10%)
=19%
Expected return on B = Risk free rate + Beta*(Market return - Risk free rate)
= 10%+ 2*(16%-10%)
=22%
Hence the situtaion are possible and may be correct.
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