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A particular asset has a beta of 1
A particular asset has a beta of 1.2 and an expected return of 10%. The expected return on the market portfolio is 13% and the risk-free rate is 5%. Which of the following statement is correct?
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This asset lies on the security market line. |
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This asset lies above the security market line. |
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This asset lies below the security market line. |
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Cannot tell from the given information. |
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None of the above |
Expert Solution
Answer:
Risk free rate = 5%
Market return is 13%
Beta = 1.2
As per Capital asset pricing model(CAPM)
Expected return = Risk free rate + Beta * (Market return – Risk free rate)
= 5% + 1.2 * (13% – 5%)
= 5% + 1.2 * 8%
= 5% + 9.6
= 14.6%
Expected return as per CAPM is 14.6% and particular asset expected return is 10%
Therefore The asset lies below the security market line.
The correct answer is This assets lies below the security market line
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