What happens to expected portfolio return if the portfolio beta increases from 1.0 to 1.5,the risk-free rate decreases from 5 to 4%,and the market risk premium increases from 8 to 9%?
A) It increases from 12 to 14.0%.
B) It increases from 13 to 17.5%.
C) It increases from 14 to 21.0%.
D) It remains unchanged.

Question

Quizplus · Accepted Answer

The expected portfolio return can be calculated using the Capital Asset Pricing Model (CAPM):
Expected portfolio return = Risk-free rate + Beta*(Market risk premium)

Using the given information, we can calculate the new expected portfolio return:

New beta = 1.5
New risk-free rate = 4%
New market risk premium = 9%

Expected portfolio return = 4% + 1.5*(9%) = 17.5%

Therefore, the expected portfolio return increases from 13 to 17.5%, which is option B.

What Happens to Expected Portfolio Return If the Portfolio Beta