The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT? A) The portfolio's required return is less than 11%. b)The required return on the market is 10%. C) If the market risk premium remains unchanged but expected inflation increases by 2%, your portfolio's required return will increase by more than 2%. D) If the risk-free rate remains unchanged but the market risk premium increases by 2%, your portfolio's required return will increase by more than 2%. e) If the stock market is efficient, your portfolio's expected return should equal the expected return on the market, which is 11%
The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT? A) The portfolio's required return is less than 11%. b)The required return on the market is 10%. C) If the market risk premium remains unchanged but expected inflation increases by 2%, your portfolio's required return will increase by more than 2%. D) If the risk-free rate remains unchanged but the market risk premium increases by 2%, your portfolio's required return will increase by more than 2%. e) If the stock market is efficient, your portfolio's expected return should equal the expected return on the market, which is 11%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT?
A) The portfolio's required return is less than 11%.
b)The required return on the market is 10%.
C)
If the market risk premium remains unchanged but expected inflation increases by 2%, your portfolio's required return will increase by more than 2%.
D) If the risk-free rate remains unchanged but the market risk premium increases by 2%, your portfolio's required return will increase by more than 2%.
e) If the stock market is efficient, your portfolio's expected return should equal the expected return on the market, which is 11%.
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