INVESTMENTS(LL)W/CONNECT
INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 9, Problem 11PS
Summary Introduction

Adequate information:

Given situation

    Portfolio Expected return Standard Deviation
    A 30% 35%
    B 40% 25%

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio X Market risk premium

Beta of the portfolio represents the sensitivity of its return to the market. It is computed as follows:

Beta of the portfolio = (Correlation between the market return and portfolio return X Standard deviation of portfolio) / Standard deviation of market

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