Question

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios a and b are 11% and 14%, respectively. the beta of a is .8, while that of b is 1.5. the t-bill rate is currently 6%, while the expected rate of return of the s&p 500 index is 12%. the standard deviation of portfolio a is 10% annually, while that of b is 31%, and that of the index is 20%.

a. if you currently hold a market index portfolio, what would be the alpha for portfolios a and b? (negative values should be indicated by a minus sign. do not round intermediate calculations. round your answers to 1 decimal place.)

Answer 1

∝ for portfolio A = E(rA) - Required return predicted by CAPM

= 0.11 - [0.06 + 0.8 × (0.12 - 0.06)]

= 0.11 - [0.06 + 0.048]

= 0.11 - 0.108

= -0.002 ≈ -0.2% to 1 decimal place

∝ for portfolio B = E(rB) - Required return predicted by CAPM

= 0.14 - [0.06 + 1.5 × (0.12 - 0.06)]

= 0.14 - [0.06 + 0.09]

= 0.14 - 0.15

= -0.01 ≈ -1.0% to 1 decimal place