Question

According to your personal analysis, the expected return of UBER should be 15.2%. However, this is not necessarily what the CAPM is saying. The expected return on the market is 10.2%, the risk-free rate is 1%, and the beta for UBER is 1.19.

You want to exploit the mispricing using an arbitrage portfolio and the recipe from the book. Give the weight in the risk-free asset in percentage.

{Give your answer as a percentage with 2 decimals, e.g., if the answer is 0.345224 (or 34.5224%) , enter 34.52 as your answer.}

Answer 1

Beta = 1.19

Risk free rate = 1%

Market return = 10.2%

As per CAPM

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

Expected return = 1% + (1.19 * (10.2% - 1%))

Expected return = 11.95%