Suppose the risk-free rate is 3.6 percent and the market portfolio has an expect

Question

Suppose the risk-free rate is 3.6 percent and the market portfolio has an expected return of 10.3 percent. The market portfolio has a variance of .0322. Portfolio Z has a correlation coefficient with the market of .22 and a variance of .32

According to the capital asset pricing model, what is the expected return on Portfolio Z? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

According to the capital asset pricing model, what is the expected return on Portfolio Z? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Beta of portfolio Z = .22 * Sq root of .32 / Sq root of .0322

= .6935

Expected return = 3.6% + .6935 * (.103 - .036)

= 8.25%

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