Question

. Risk free return is at 5% and expected return of market portfolio is 16%. Find out the expected returns of the securities with a beta of (a) 1.25 (b) .8 and (c) 1?

Answer 1

Given:
Risk free return is at 5% and expected return of market portfolio is 16%.
To find:
The expected returns of the securities with a beta of (a) 1.25 (b) .8 and (c) 1
Formula to be used:
E(R) = Risk free return + beta (ER of market portfolio - Risk free return)

Calculation:
(a) The expected returns of the securities with a beta of 1.25:
E(R) = 5% + 1.25(16%-5%) = 5% + 1.25 * 11% = 5% + 13.75% = 18.75%
The expected returns of the securities with a beta of 1.25 is 18.75 %

(b) The expected returns of the securities with a beta of 0.8:
E(R) = 5% + 0.8(16%-5%) = 5% + 0.8 * 11% = 5% + 8.8% = 13.8%
The expected returns of the securities with a beta of 0.8 is 13.8 %

(c) The expected returns of the securities with a beta of 1:
E(R) = 5% + 1 (16%-5%) = 5% + 1* 11% = 5% + 11% = 16%
The expected returns of the securities with a beta of 1 is 16 %