Reference no: EM131296673
The risk-free rate, R subscript f , is 6 percent and the market risk premium, open parentheses R with hat on top subscript m minus R subscript f close parentheses , is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is most correct? [Hint, the beta of a portfolio is the weighted average of individual security betas]:
a. The portfolio's required return is less than 11 percent.
b. If the risk-free rate remains unchanged but the market risk premium increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points.
c. If the market risk premium remains unchanged but expected inflation increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points.
d. If the stock market is efficient, your portfolio's expected return should equal the expected return on the market, which is 11 percent.
e. None of the above answers is correct.
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