The expected return on the market is 12% with a standard deviation of 15% and the risk-free rate is 5%.What is the required return on an efficient portfolio that has a standard deviation of 18%?
A)10.83%
B)12.67%
C)13.40%
D)14.40%

Question

Quizplus · Accepted Answer

According to the capital asset pricing model (CAPM), the required return on an efficient portfolio can be calculated as follows:

Required return = risk-free rate + beta*(expected market return - risk-free rate)

To calculate the portfolio beta, we need to use the formula:

Portfolio beta = (portfolio standard deviation / market standard deviation) * correlation coefficient

Assuming a correlation coefficient of 1 between the portfolio and the market, we can solve for the portfolio beta:

Portfolio beta = (18% / 15%) * 1 = 1.2

Plugging this into the CAPM formula:

Required return = 5% + 1.2*(12% - 5%) = 13.4%

Therefore, the best choice is C, with a required return of 13.4%.

The Expected Return on the Market Is 12% with a Standard