Question

Problem 7-18 37 Consider the following information: Beta points Portfolio Risk-free Market Expected Return 78 13.3 10.0 Skipped 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.) eBook Expected return % Print b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) References Alpha c. If the simple CAPM is valid, is the above situation possible? Yes NO

Answer 1

Using CAPM Model

Expected Return of Portfolio A = 0.07 + 0.70(0.133 - 0.07)

Expected Return of Portfolio A = 11.41%

Alpha = 0.10 - 0.1141

Alpha = -1.41%