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Question:
The risk-free rate is 5% and the expected market risk premium is 10%. A portfolio manager is projecting a return of 20% on a portfolio with a beta of 1.5. After adjusting for its systematic risk, this portfolio is expected to:
A
equal the market’s performance.
explanation
Based on the CAPM, the portfolio should earn: E(R) = 0.05 + 1.5(0.10) = 20%. On a risk-adjusted basis, this portfolio lies on the security market line (SML) and thus is earning a risk-adjusted rate of return equivalent to that of the market portfolio.
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