Question

Consider the following information:

Portfolio Expected Return
Standard
Deviation
Risk-
free 10 % 0 %
Market 18 20
A 15 22
If the simple CAPM is valid, is the above situation possible?
<=Answer Here

Answer 1

The simple CAPM equation states that the expected return of a portfolio is based on the risk-free rate, beta, and the market return. In this case, the expected return for Portfolio A is lower than the risk-free rate, making the situation not possible under the simple CAPM.

Step-by-step explanation:

The simple CAPM (Capital Asset Pricing Model) equation is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). In this case, the risk-free rate is 10% and the market's expected return is 18%. To determine if the situation is valid, we need to check if the expected return for each investment matches the equation. For Portfolio A, the expected return is 15%, which is lower than the risk-free rate. Therefore, the situation is not possible under the simple CAPM.