Question
I don't know where I wrong Suppose that the risk-free rate is 2%, and the market portfolio has an expected return of 8%. The market
I don't know where I wrong
Suppose that the risk-free rate is 2%, and the market portfolio has an expected return of 8%. The market portfolio has a variance of 0.0121. Portfolio Z has a correlation coefficient with the market of 0.45 and a variance of 0.0169. According to CAPM, what is the expected return on portfolio Z? Round off your answer to two decimal points. (i.e. "x.xx")
The expected return-beta relationship is the following:
E(ri) = rf + i * E(rm - rf)
where,
E(ri) is the expected return of asset i
E(rm) is the expected return of the market portfolio
rf is the risk-free rate
i is the beta of asset i
The expected return of portfolio Z is given by the following relationship:
E(rz) = rf + z * E(rm - rf)
The beta of the portfolio Z is given by the following relationship:
z = cov (rz , rm) / 2m = (zm * z * m )/ 2m = (zm * z ) / m
z = 0.45*(0.0169)^0.5/(0.0121)^0.5=0.532
E(rz) = 2%+0.532*(8-2)% = 5.19% (this is my answer but is wrong!!)
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