Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent.If you create portfolio with the same risk as the market, what rate of return should you expect to earn?
A)10.67 percent
B)11.18 percent
C)11.62 percent
D)11.25 percent
E)11.13 percent

Question

Quizplus · Accepted Answer

The correct answer is D because the expected return of a portfolio with the same risk as the market is equal to the risk-free rate plus the market risk premium multiplied by the portfolio's beta. The risk-free rate is assumed to be 5%, and the market risk premium is assumed to be 6%. Therefore, the expected return of a portfolio with the same risk as the market is 5% + 6% * 1 = 11%.

Stock J Has a Beta of 1