Question

You believe that CAPM holds. You decide to construct a zero beta portfolio. What is the expected return on that portfolio?

a. the market risk premium
b. the market's return rate.
с. zero
d. the riskfree rate.
e. None of the other options is correct.

Answer 1

The expected return on a zero beta portfolio would be equal to d. the risk-free rate.

Step-by-step explanation:

To construct a zero beta portfolio, you would need to invest in assets with a beta of zero. Beta measures the sensitivity of an asset's returns to the overall market. A zero beta asset would not be affected by market movements and would have no systematic risk. Since the expected return on a risk-free asset, such as a U.S. Treasury bill, is equivalent to the risk-free rate, the expected return on a zero beta portfolio would be equal to the risk-free rate.