The risk-free rate, KRF, is 6 percent and the market risk premium, (KM – KRF), is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is most correct?
A-The portfolio’s required return is less than 11 percent.
B-If the risk-free rate remains unchanged but the market risk premium increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points.
C-If the market risk premium remains unchanged but expected inflation increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points.
D-If the stock market is efficient, your portfolio’s expected return should equal the expected return on the market, which is 11 percent.
E-None of the above answers is correct.