A friend tells you about a mutual fund called the Global Asset Fund.The fund's expected return and beta for next year are shown in the table below.The expected return and beta of the risk free asset and the market portfolio are also shown in the table.Consider an alternative investment strategy of investing in a portfolio on the Security Market Line with the same beta as the Global Asset Fund.What return should you expect to earn from that portfolio?

A) 12%
B) 13%
C) 14%
D) 15%
E) 16%

Question

A friend tells you about a mutual fund called the Global Asset Fund.The fund's expected return and beta for next year are shown in the table below.The expected return and beta of the risk free asset and the market portfolio are also shown in the table.Consider an alternative investment strategy of investing in a portfolio on the Security Market Line with the same beta as the Global Asset Fund.What return should you expect to earn from that portfolio?

A) 12% 
B) 13% 
C) 14% 
D) 15% 
E) 16%

Quizplus · Accepted Answer

Any portfolio on the SML will earn a return given by the CAPM: E(k_i) = k_F + β_i[E(k_M) - k_F] E(k_i) = 0.055 + 1.59 [0.115 - 0.055] E(k_i) = 0.15 or 15%

A Friend Tells You About a Mutual Fund Called the Global