Assume that the risk-free rate is 9% and that the market portfolio has an expected return of 17%.What expected return would be consistent with the CAPM for a security with a beta of 1.5?

Question

Quizplus · Accepted Answer

According to the CAPM formula, the expected return on a security is equal to the risk-free rate plus the security's beta multiplied by the market risk premium (the difference between the expected return on the market portfolio and the risk-free rate).

So, using the given information:

Expected return = 9% + 1.5(17% - 9%)

Expected return = 9% + 1.5(8%)

Expected return = 9% + 12%

Expected return = 21%

Therefore, the expected return that would be consistent with the CAPM for a security with a beta of 1.5 is 21%. Choice B is the correct answer.

Assume That the Risk-Free Rate Is 9% and That the Market