Question

If the simple CAPM is valid, say whether the situation is possible or not?

Portfolio	Expected Return	Beta
Risk-free	5	0
Market	17	1.4
A	15	1.7

Answer 1

The above situation is not possible. Beta of a security shows the risk associated with the security. Higher the beta, higher the risk. And by the principles of finance, higher risk would demand higher return.

First, beta of market has to be 1.0. Additionally, in the situation given above, for security A, Beta is 1.7, expected return is less than the beta for market, then the expected return should also be higher for security A, when compared to that of market.