In: Finance
Consider the following information:
Portfolio Expected Return Beta
Risk free. 12% 0
Market 12.6% 1
A 10.6% 0.7
a) calculate the expected return of Portfolio A with a beta of 0.7
b) what is the alpha of portfolio A?
a) Expected return = risk free rate + (market return - risk free rate) *beta
= 12% + ( 12.6% - 12%) * .7 = 12.42%
b) Alpha = Portfolio return - expected return = 10.6% - 12.42% = -2.42%