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A student is wondering how much risk she must take to generate an acceptable ret

ID: 2712352 • Letter: A

Question

A student is wondering how much risk she must take to generate an acceptable return of her portfolio. The current risk free return is 5%. The return of the overall stock market is 16%. USE the CAPM to calculate how high the beta coefficient of Rosemary's portfolio would have to be to achieve each of the following expected portfolio returns shown on the left A-D.

E. ROSE is risk averse. What is the highest return she can expect if she is unwilling to take more risk than the average risk?

A 10% B 15% C 18% D 20% note   Beta = 's       r-Rf/rm-Rf

Explanation / Answer

= (r-Rf)÷(Rm-Rf)

A)

= (10%-5%)÷(16%-5%)

= 0.45

B)

= (15%-5%)÷(16%-5%)

= 0.91

C)

= (18%-5%)÷(16%-5%)

= 1.18

D)

= (20%-5%)÷(16%-5%)

= 1.36

E)

Average risk is market risk, i.e beta will be 1

Dr Jack
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