An analyst at CAPM Research Inc. is projecting a return of 21% on Portfolio A. The market risk premium is 11%，the volatility of the market portfolio is 14%, and the risk‐free rate is 4.5%. Portfolio A has a beta of 1.5. According to the capital asset pricing model, which of the following statements is true?
A. The expected return of Portfolio A is greater than the expected return of the market portfolio.
B. The expected return of Portfolio A is less than the expected return of the market portfolio.
C. The return of Portfolio A has lower volatility than the market portfolio.
D. The expected return of Portfolio A is equal to the expected return of the market portfolio.
Answer:A
According to the CAPM, the required return on portfolio A is RF+β[E(RM)- RF]=4.5+1.5[11]=21% indeed. Because the beta is greater than 1, it must be greater than the expected return on the market, which is 15.5%. mote that the question has a lot of extraneous information.