Answer: equal the performance predicted by the CAPM.

## Explanation To determine whether the portfolio outperforms or underperforms the CAPM prediction, we need to calculate the expected return using the Capital Asset Pricing Model (CAPM) formula: **CAPM Formula:** \[ E(R_p) = R_f + \beta_p \times (E(R_m) - R_f) \] Where: - \( R_f \) = Risk-free rate = 5% = 0.05 - \( \beta_p \) = Portfolio beta = 0.7 - \( E(R_m) - R_f \) = Market risk premium = 10% = 0.10 **Calculate CAPM expected return:** \[ E(R_p) = 0.05 + 0.7 \times 0.10 = 0.05 + 0.07 = 0.12 = 12\% \] **Compare with projected return:** - CAPM expected return: 12% - Portfolio manager's projected return: 12% **Analysis:** The portfolio manager's projected return (12%) exactly equals the CAPM expected return (12%). This means the portfolio is expected to perform exactly as predicted by the CAPM model after adjusting for risk. However, looking at the options: - **A**: "equal the performance predicted by the CAPM" - This would be correct - **B**: "outperform the CAPM return" - This would be incorrect - **C**: "underperform the CAPM return" - This would be incorrect - **D**: "unable to determine" - This would be incorrect **Correction:** Based on the calculation, the portfolio is expected to **equal** the CAPM performance, not outperform it. Therefore, the correct answer should be **A**. **Final Answer: A**

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