What happens to expected portfolio return if the portfolio Beta increases from 1.0 to 1.5, the risk-free rate decreases from 5% to 4%, and the market risk premium increases from 8% to 9%? A)It increases from 12% to 14% B)It increases from 13% to 17.5% C)It increases from 14% to 21% D)It remains unchanged R_p = 5% + 1(8) = 13% R_p = 4% +1.5(9) = 17.5%

Question

Quizplus · Accepted Answer

The expected portfolio return can be calculated using the Capital Asset Pricing Model (CAPM). With an increase in portfolio beta from 1.0 to 1.5, and an increase in the market risk premium from 8% to 9%, the expected portfolio return increases. However, with a decrease in the risk-free rate from 5% to 4%, the expected portfolio return decreases. Using the CAPM formula, the new expected portfolio return can be calculated as: R_p = 4% + 1.5(9) = 17.5%. Therefore, the answer is option B.

What Happens to Expected Portfolio Return If the Portfolio Beta