Suppose the risk-free rate is 5.1 percent and the market portfolio has an expected return of 11.8 percent. The market portfolio has a variance of .0472. Portfolio Z has a correlation coefficient with the market of .37 and a variance of .3375  According to the capital asset pricing model, what is the expected return on Portfolio Z?

Question
Asked Nov 11, 2019
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Suppose the risk-free rate is 5.1 percent and the market portfolio has an expected return of 11.8 percent. The market portfolio has a variance of .0472. Portfolio Z has a correlation coefficient with the market of .37 and a variance of .3375

  

According to the capital asset pricing model, what is the expected return on Portfolio Z?

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Expert Answer

Step 1

Standard deviation of market portfolio and portfolio Z is calculated. Then covariance and beta of the portfolio Z is calculated as in the excel below:

Step 2
A
C
Е
F
Variance Correlation co-efficient Standard deviation Co-variance(M,Z) beta
0.0472
0.21725561
2 Market Portfolio
0.9893902205270560
0.37
0.046699218
3 Portfolio Z
0.3375
0.580947502
в
D
E
F
Variance Correlation co-efficient Standard deviation Co-variance(M,Z) |beta
SQRT(B2)
=SQRT(B3)
E2/B2
2 Market Portfolio 0.0472
0.3375
0.37
3 Portfolio Zz
C2*D3 D2
co.
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A C Е F Variance Correlation co-efficient Standard deviation Co-variance(M,Z) beta 0.0472 0.21725561 2 Market Portfolio 0.9893902205270560 0.37 0.046699218 3 Portfolio Z 0.3375 0.580947502 в D E F Variance Correlation co-efficient Standard deviation Co-variance(M,Z) |beta SQRT(B2) =SQRT(B3) E2/B2 2 Market Portfolio 0.0472 0.3375 0.37 3 Portfolio Zz C2*D3 D2 co.

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Step 3

Using CAPM m...

E(R) R,+betax(R -R,
=5.1% +0.989390220527056 x 1 1.8%-5.1%)
=5.1% +6.62891447753127%
11.7289144775313% or 11.73%
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E(R) R,+betax(R -R, =5.1% +0.989390220527056 x 1 1.8%-5.1%) =5.1% +6.62891447753127% 11.7289144775313% or 11.73%

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