An investor was expecting an 18% return on her portfolio with beta of 1.25 before the market risk premium decreased from 8 to 6%.Based on this change,what return will now be expected on the portfolio?

Question

Quizplus · Accepted Answer

The new expected return on the portfolio can be calculated using the Capital Asset Pricing Model (CAPM) formula:

Expected return = risk-free rate + beta x (market risk premium)

Before the change in market risk premium, the expected return was:

18% = risk-free rate + 1.25 x (8%)

Solving for the risk-free rate, we get:

risk-free rate = 18% - 1.25 x (8%) = 8%

After the change in market risk premium, the expected return can be calculated as:

Expected return = 8% + 1.25 x (6%) = 15.5%

Therefore, the answer is A) 15.5%.

An Investor Was Expecting an 18% Return on Her Portfolio