Suppose that borrowing is restricted so that the zero-beta version of the capm holds. the expected return on the market portfolio is 17%, and on the zero-beta portfolio it is 5%. what is the expected return on a portfolio with a beta of 0.7?

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Business

Ruth Robbins

22 December, 08:35

Suppose that borrowing is restricted so that the zero-beta version of the capm holds. the expected return on the market portfolio is 17%, and on the zero-beta portfolio it is 5%. what is the expected return on a portfolio with a beta of 0.7?

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Steven Durham · Answer 1

The expected return on a portfolio with a beta of 0.7 is 13.4%.

A zero-beta portfolio is a portfolio that is constructed in such a way that its systematic risk or beta is zero.

A zero beta portfolio would have the same expected return as the risk-free rate.

In the given question, we can use the zero beta return in place of the risk free rate in the CAPM equation as follows:

Expected Rate of return = Rf + β (Rm - Rf)

Expected Return = 0.05 + 0.7 (0.17-0.05) = 0.134 or 13.4%