Question

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y _________.A. are in equilibriumB. offer an arbitrage opportunityC. are both underpricedD. are both fairly priced

Answer 1

Answer:

The correct option is A, Portfolios X and Y are in equilibrium

Explanation:

Adopting Miller and Modgiliani Capital Asset Pricing Model formula, the return on both portfolios can be determined:

Expected return=Risk free return+Beta(Market return-Risk free return)

Portfolio X:

Risk free return=8%

Beta=1.0

Expected return=14%

Let market return be MR

14%=8%+1.0(MR-8%)

14%-8%=1.0*(MR-8%)

6%=MR-8%

MR=6%+8%

MR=14%

Portfolio Y:

Risk free return=8%

Beta=0.25

Expected return=9.5%

let market return be MR

9.5%=8%+0.25(MR-8%)

9.5%-8%=0.25MR-2%

1.5%=0.25MR-2%

1.5%+2%=0.25MR

0.25MR=3.5%

MR=3.5%/0.25

MR=14%

Hence both portfolios are at equilibrium since they have the same market return

                         

Answer 2

In this situation, you would conclude that portfolios X and Y A. are in equilibrium.

Given that,

• Rx = Return on Portfolio X = 14% .
• Ry = Return on Portfolio Y = 9.5% .
• Rf = Risk free rate = 8% .
• Rm = Expected return on Market = ? .
• Beta of (portfolio) X = 1 .
• Beta of (portfolio) Y = 0.25

Based on the above information, the calculation is as follows:

• For portfolio X

Rx = Rf + Beta of X × (Rm - Rf)

14% = 8% + 1 × (Rm - 8%)

Rm = 14%

• Now for portfolio Y

Ry = Rf + Beta of Y × (Rm - Rf)

9.5% = 8% + 0.25 × (Rm - Rf)

Rm - Rf = 1.5% ÷ 0.25

Rm = 6% + 8% = 14%

As both the portfolios contains the similar market return so they should be in the equilibrium.

Learn more: brainly.com/question/6201432