Tony is wondering how much risk he must accept in order to generate a reasonable return on his portfolio. The risk-free return currently is 5 percent. The return on the market portfolio is 16 percent. Use the Capital Asset Pricing Model to calculate the beta coefficient associated with each of the following portfolio returns.
a) 10 percent
b) 15 percent
c) 18 percent
d) 20 percent
e) Draw a security market line based on the above data; Tony is risk-averse. What is the highest return he can expect if he is unwilling to take more than an average risk?
Please see the attached file for a breakdown of the solution.
Answer to 590316
According to the capital asset pricing model (CAPM),
Required return = Risk free rate + [Beta x (Market return - Risk free rate)]
a) 10% = 5% + [Beta x (16% - 5%)]
This solution offers a single page of detailed step-wise calculations and a graph related a problem, pertaining to a capital asset pricing model. It calculates the highest return that a risk averse investor can expect.