CAS Exam 9 Spring 2018, Question 3
Study guide: Exam 9
Given the following for a portfolio:
| Stock | Beta | Capitalization ($) |
|---|---|---|
| A | 1.10 | 20,000 |
| B | 1.25 | 50,000 |
| C | 0.90 | 30,000 |
- The risk-free rate is 5%.
- The market price of risk is 1.5.
- The standard deviation of the market portfolio is 20%.
Part a (1.5 points)
Using the traditional Capital Asset Pricing Model (CAPM), calculate the expected rate of return on the portfolio.
Part b (0.75 points)
Explain the zero-beta version of the CAPM.
Part c (0.5 points)
Assume the zero-beta version of the CAPM holds. The expected rate of return on the zero-beta portfolio is 8%. Calculate the expected rate of return on the above portfolio.
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