Question

Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: a. What is the expected rate of return on the market portfolio?

Answer 1

Answer: 12%

Explanation:

The Capital Asset Pricing Model can be used to calculate the expected return of the portfolio using the formula;

Expected Return = Risk-free rate + beta ( market return - risk-free rate)

Expected Return = 5% + 1(12% - 5%)

Expected Return= 5% + 7%

Expected Return = 12%