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Portfolio has beta =1.5; its alpha is 1%, risk free rate is 5%; market expected return is 10%. Find the market risk premium R_mt, expected
Portfolio has beta =1.5; its alpha is 1%, risk free rate is 5%; market expected return is 10%.
Find the market risk premium R_mt, expected return r_portfolio and excess return R_portfolio.
Use the formula- R_portfolio= beta_portfolio *R_market} + alpha + e_portfolio;
Where each security R=r-r_free is excess return;
Is such portfolio over-, under-, or fairly priced? Assume, portfolio is well diversified. Which term(s) should be
negligible?
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