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Answer: 1.13
## Explanation To calculate beta using the Capital Asset Pricing Model (CAPM), we use the formula: \[ \beta = \frac{E(R_i) - R_f}{E(R_m) - R_f} \] Where: - \( E(R_i) \) = Expected return of the Atlantis Fund = 8.3% - \( R_f \) = Risk-free rate = 2.0% - \( E(R_m) \) = Expected return of the market (S&P 500) = 7.6% Plugging in the values: \[ \beta = \frac{8.3\% - 2.0\%}{7.6\% - 2.0\%} = \frac{6.3\%}{5.6\%} = 1.125 \] However, this gives us 1.125, which is not exactly matching any of the options. Let me verify the calculation: - Atlantis Fund excess return = 8.3% - 2.0% = 6.3% - Market excess return = 7.6% - 2.0% = 5.6% - Beta = 6.3% / 5.6% = 1.125 Looking at the options, 1.13 is the closest to our calculated value of 1.125. The volatility information (10.8% for S&P 500 and 8.8% for Atlantis Fund) is not needed for CAPM beta calculation, as CAPM beta is calculated using returns, not volatilities. Therefore, the correct answer is **C. 1.13**.
Author: LeetQuiz .
Suppose the S&P 500 has an expected annual return of 7.6% and volatility of 10.8%. Suppose the Atlantis Fund has an expected annual return of 8.3% and volatility of 8.8% and is benchmarked against the S&P 500. If the risk-free rate is 2.0% per year, what is the beta of the Atlantis Fund according to the Capital Asset Pricing Model?
A
0.81
B
0.89
C
1.13
D
1.23