Select the statement which correctly describes the calculation of the required rate of return of a portfolio.
A) Given efficient portfolio construction, the return on the portfolio can be greater than the highest yielding asset included in the portfolio.
B) It decreases in direct proportion to the market as the expected return on the market increases.
C) It increases if the risk-free rate increases; everything else remaining constant.
D) It is independent of changes in both the market return and the risk-free rate.

Question

Quizplus · Accepted Answer

The required rate of return on a portfolio increases if the risk-free rate increases, assuming all other factors remain constant. This is because the risk-free rate is a component of the Capital Asset Pricing Model (CAPM), which is used to calculate the expected return on a portfolio. When the risk-free rate increases, the expected return on the portfolio increases as well, to compensate for the higher opportunity cost of investing in the portfolio rather than in risk-free assets.

Select the Statement Which Correctly Describes the Calculation of the Required