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Consider two large diversified portfolios A and B
Consider two large diversified portfolios A and B. Portfolio A has a beta of 1.0 and an expected return of 13%. Portfolio B has a beta of 2.0 and an expected return of 26%. The risk-free rate is 4%. Are the expected returns and betas consistent with a single-factor model? O No O Yes O Cannot be determined
Expert Solution
Portfolio A:
ß = 1
Expected return = 13%
Rf = 4%
Ke = Rf + ß ( Rm - Rf )
= 4% + 1 ( 13% - 4% )
= 13%
Portfolio A expected return and ß are consistent with the single factor model.
Portfolio B:
ß = 2
Expected return = 26%
Rf = 4%
Ke = Rf + ß ( Rm - Rf )
= 4% + 2 ( 26% - 4% )
= 48%
Portfolio B expected return and ß are not consistent with the single factor model
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