If the CAPM is valid and all portfolios are priced correctly, which of the situations below is/are NOT possible? Consider each situation independently, and assume the risk-free rate is 5%. Situation A Portfolio RISKFREE MARKET ABC O Situation A only O Situation B only O Situation A and B ONeither situation Expected Return 5% 10% 12.5% BETA 0 1.0 1.3 Situation B Portfolio RISKFREE ABC XYZ Expected Return 5% 13.2% 14% BETA 0 1.0 0.8

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A:

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Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.