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Consider an APT world with one systematic risk: MARKET risk. Expected return for the market portfolio...

Consider an APT world with one systematic risk: MARKET risk. Expected return for the market portfolio is 8% and risk-free rate is 2%. A stock analyst estimates the following characteristics for the Portfolio ABC. Assume that the analyst estimates are correct.

Portfolio E(R) Market BETA
ABC 11.0% 1.8


What is the NO-ARBITRAGE (i.e. in equilibrium) expected return for portfolio ABC?

10.0%

10.5%

11.0%

12.0%

12.8%

Solutions

Expert Solution

No arbitrage expected return for portfolio ABC =Risk Free Rate + Beta*(Market Return-Risk Free Rate)
=2%+1.8*(8%-2%) =12.8%

No arbitrage expected return for portfolio ABC is 12.8%(Option e is correct option)

jeff jeffy answered 2 years ago
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