(Solution) - Assume that CAPM holds i e ri r0 i rm r0 -(2025 Original AI-Free Solution)

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Assume that CAPM holds, i.e. ri = r0 + ?i(rm-r0), where ?i = ?im/?m2. The goal is to create a portfolio of stocks X, Y, and the risk-free asset. The beta of the portfolio is ?P = 0.70. X has a beta of 1.5 and Y has a beta of 2.0. Expected return of Y is 10% more than the expected return of X. Risk-free rate is 5%. What is the expected return of this portfolio?