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17 January, 16:27

Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model:

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  1. 17 January, 16:42
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    Answer: ER (P) = Rf + β (Rm - Rf)

    ER (P) = 7 + 1 (13-7)

    ER (P) = 7 + 6

    ER (P) = 13%

    Explanation: According to capital asset pricing model, the expected return on a portfolio is a function of risk free rate and market risk premium. Market risk premium is the product of Beta (market risk) and risk premium ie β (Rm-Rf)
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