If a rate of return of 13.8% is expected on a stock with a beta of 1.2 when the risk free rate is 3% and the market risk premium is 9%, the expected return on the market portfolio is 11%.

Question

Quizplus · Accepted Answer

The expected return on the market portfolio is calculated using the formula for the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + (Beta * Market Risk Premium). Given a risk-free rate of 3% and a market risk premium of 9%, the expected return on the market portfolio is actually 12% (3% + (1 * 9%)), not 11%.

If a Rate of Return of 13