Chapter 12, Problem 5QAP

Summary Introduction

Adequate information:

Beta 1 of Portfolio A $\left({\text{β}}_{\text{1}}{\text{P}}_{\text{A}}\right)$ = 0.85

Beta 2 of Portfolio A $\left({\text{β}}_{\text{2}}{\text{P}}_{\text{A}}\right)$ = 1.15

Expected return of Portfolio A $\left({\text{ERP}}_{\text{A}}\right)$ = 16%

Beta 1 of Portfolio B $\left({\text{β}}_{\text{1}}{\text{P}}_{\text{B}}\right)$ = 1.45

Beta 2 of Portfolio B $\left({\text{β}}_{\text{2}}{\text{P}}_{\text{B}}\right)$ = -0.25

Expected return of Portfolio B $\left({\text{ERP}}_{\text{B}}\right)$ = 12%

Risk-free rate $\left({\text{R}}_{\text{f}}\right)$ = 4%

To compute: Risk premiums

Introduction: Risk premium refers to the compensation made to the investors in lieu of the excess risk bear by them.