Canadian Securities Course (CSC) Practice Exam · Question
An investor owns two stocks: Stock A and Stock B. Stock A has a beta of 1.2, and Stock B has a beta of 0.8. The current market risk premium is 6%, and the risk-free rate is 2%. Using the Capital Asset Pricing Model (CAPM), what is the expected return for a portfolio composed of 70% Stock A and 30% Stock B?
First, calculate the portfolio beta: (0.70 * 1.2) + (0.30 * 0.8) = 0.84 + 0.24 = 1.08. Then, apply CAPM: Risk-Free Rate + Portfolio Beta * Market Risk Premium =
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Question: An investor owns two stocks: Stock A and Stock B. Stock A has a beta of 1.2, and Stock B has a beta of 0.8. The current market risk premium is 6%, and the risk-free rate is 2%. Using the Capital Asset Pricing Model (CAPM), what is the expected return for a portfolio composed of 70% Stock A and 30% Stock B?
Answer options: ✅ 9.36%
- 10.00%
- 10.40%
- 11.20%
Correct answer: 9.36%
Explanation: First, calculate the portfolio beta: (0.70 * 1.2) + (0.30 * 0.8) = 0.84 + 0.24 = 1.08. Then, apply CAPM: Risk-Free Rate + Portfolio Beta * Market Risk Premium = 2% + 1.08 * 6% = 2% + 6.48% = 8.48%.
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