Question

1. Consider the CAPM. The risk-free rate is 4%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.2?
A.
6%
B.
15.6%
C.
18%
D.
20.8%

2. The CAL provided by combinations of 1-month T-bills and a broad index of common stocks (i.e. market portfolio) is called the ______.
A.
SML
B.
CAPM
C.
CML
D.
total return line

Answer 1

1.

Beta of portfolio = 1.20

Risk free rate = 4%

Return of market = 18%

Expected rate of return of portfolio is calculated below using CAPM model:

Expected rate of return = Risk free rate + (Market Return - Risk free rate) × Beta

                                      = 4% + (18% - 4%) × 1.20

                                      = 4% + (14% × 1.20)

                                      = 4% + 16.80%

                                      = 20.80%

Hence, Expected rate of return of portfolio is 20.80%.

Option (D) is correct answer.

2.

he CAL provided by combinations of 1-month T-bills and a broad index of common stocks (i.e. market portfolio) is called the Capital Market Line.

Option (C) is correct answer.