Explanation:
Based on the CAPM, the portfolio should earn: . On a risk-adjusted basis, this portfolio lies on the security market line (SML) and thus is earning the proper risk-adjusted rate of return.
(Book 1, Module 5.2, LO 5.e)
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Question 39
The risk-free rate is 5% and the expected market risk premium is 10%. A portfolio manager is projecting a return of 12%. The portfolio has a beta of 0.7, and the market beta is 1.0. After adjusting for risk, this portfolio is expected to:
A
equal the performance predicted by the CAPM.
B
outperform the CAPM return.
C
underperform the CAPM return.
D
unable to determine based on the information provided.
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