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Expert-verified Found in: Page 226 ### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently. The correct answer would be “Not Possible”

See the step by step solution

## Given Information

Expected return of Portfolio = 16%

Beta = 0.9

Risk free rate = 10%

Market expected rate = 18%

Given these data, the SML is: E(r) = 10% + β(18% – 10%)

## Finding the required rate of return for Portfolio A

Here, the required expected return for Portfolio A is:

E (r) = r f + β [E(rM – rf)]

E(r) = 10% + (0.9% x 8%) = 17.2%

This is still higher than 16%. Portfolio A is overpriced, with alpha equal to: –1.2%

This is inconsistent with the CAPM hence “Not Possible’. ### Want to see more solutions like these? 