Investment in portfolio A has a standard deviation of 9%, while investment in portfolio B has a standard deviation of 14%. In order to tolerate the increased risk, what would you as an investor expect?
a. A higher expected return for portfolio A.
b. A higher expected return for portfolio B.
c. An equal return for either portfolio A or portfolio B.
d. Avoidance of portfolio B.
The required rate of return for an investment can be calculated from the capital asset pricing model as follows:
a. Use only the return on 3-month Treasury bills to determine the required return.
b. Use the beta of the investment to determine the required return.
c. Use the risk-free rate, plus the investment’s beta times a premium for systematic risk.
d. Use the risk-free rate, plus the investment’s beta times a premium for diversifiable risk.