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%.
B)it increases from 13% to 17.5%.
C)it increases from 14% to 21%.
D)it remains unchanged.

Question

Quizplus · Accepted Answer

The expected portfolio return is calculated as follows: 
Expected Portfolio Return = Risk-Free Rate + (Beta x Market Risk Premium)

Initial values: 
Beta = 1.0 
Risk-Free Rate = 5% 
Market Risk Premium = 8% 
Expected Portfolio Return = 5% + (1.0 x 8%) = 13%

New values: 
Beta = 1.5 
Risk-Free Rate = 4% 
Market Risk Premium = 9% 
Expected Portfolio Return = 4% + (1.5 x 9%) = 17.5%

Therefore, the expected portfolio return increases from 13% to 17.5%. The correct answer is (B).

What Happens to Expected Portfolio Return If the Portfolio Beta