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Bernie, John, and Ted run mutual funds
Bernie, John, and Ted run mutual funds. The expected return on Bernie's portfolio is 12% while the expected return on John's portfolio is 6%. Single-factor model estimates Portfolio Factor 1 Beta Bernie 4.0 John 1.0 Ted 2.0 According to a single-factor model, what is the expected return on Ted's portfolio? O 21.0% 10.0% 9.5% O 8.0% O 11.4%
Expert Solution
According to Single Factor Model : E(Ri) = RF + βi (RM - RF)
For Bernie's Portfolio, 12% = RF + (4) (RM - RF) - - - - - - - - - - - - (i)
For John's Portfolio, 6% = RF + (1) (RM - RF) - - - - - - - - - - - - - - (ii)
Solving Equations (i) and (ii), we get RM = 6% and RF = 4%
Thus, For Ted's Portfolio, E(R) = 4% + (2) (6% - 4%) = 8%
Hence, correct option is (d) 8.0%
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