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Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%.Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down.Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down.Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down.
-The expected return on a security with a beta of 1 is closest to:
A)-4.0%.
B)3.2%.
C)4.0%.
D)8.0%.

Question

Quizplus · Accepted Answer

The expected return on a security with a beta of 1 is the same as the expected return of the market portfolio. The market portfolio has a 50% chance of increasing by 24% and a 50% chance of decreasing by 8%. The expected return is (0.5 * 24%) + (0.5 * -8%) = 8%.

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