The Risk-Free Rate and the Expected Market Rate of Return

question 31

Multiple Choice

The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively.According to the capital asset pricing model (CAPM) , the expected rate of return on a security with a beta of 1.25 is equal to

• A)0.142.
• B)0.144.
• C)0.153.
• D)0.134.

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Definitions:

Leverage

Utilizing borrowed funds to amplify the possible returns on an investment.

Portfolio's Beta

A measure of the overall volatility or risk of an investment portfolio in comparison to the market as a whole.

S&P500 Value

A measurement of the stock performance of 500 large companies listed on stock exchanges in the United States.

Portfolio Value

The total market value of all the investments held by an individual or institution, including stocks, bonds, and other securities.