Question 4 (20 marks)

(a)What is the beta value of a market portfolio? (4 marks)

(b)What is the expected rate of return on a security with beta = 0? (4 marks)

(c)Given that risk-free rate = 3% and market return = 8%, for a stock with a beta of 1.4, what is the expected return of this stock under CAPM? (8 marks)

(d)Given that risk-free rate = 3% and market return = 8%, if a security with a beta of 1.4 actually delivers 7% return, under CAPM, is this security underpriced or overpriced? What should investors do to capture this opportunity? Please explain.(4 marks)

Answer rating: 100% (QA)

a The beta value of a market portfolio is 1 b The expected rate of return on a security with beta 0 ... View the full answer