Market Portfolio Has an Expected Return

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Market portfolio has an expected return of 11% and volatility of 20%. Risk-free rate is 3%. Security X and Y have betas of 1.4 and 0.9 respectively.

a) According to CAPM, what are the expected return of X and Y?

E(rm)-rf = 11% – 3% = 8%

3% +1.4*8% = 14.2%

3% +1.4 *8% = 10.2%