Consider the following information a Calculate the the retur

Consider the following information:

a. Calculate the the return predicted by CAPM for a portfolio with a beta of 1.5. (Round your answer to 2 decimal places.)

Return             %

b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Alpha             %

c. If the simple CAPM is valid, is the situation above possible?

Portfolio	Expected Return	Beta
Risk-free	6	%	0
Market	12.0		1.0
A	10.0		1.5

Solution

1) Expected return as per CAPM = Rf +(Rm-Rf) x Beta Return of given portfolio = 6 + (12-6) x 1.5 Return of given portfolio = 15 2) Alpha of portfolio = Required return - Expected return(CAPM) 10 - 15 = -5 3) Since the alpha is negative the portfolio is overrated. Hence it will fall below the security market line. Therefore CAPM is inconsitant.