Assume that the economy has three types of people. 20% are fad followers, 75% are passive investors and 5% are informed traders.

Question

18 days ago

13

Assume that the economy has three types of people. 20% are fad followers, 75% are passive investors and 5% are informed traders.

The portfolio consisting of all informed traders has a beta of 1.4 and an expected return of 12.4%. The market has an expected return of 10% and the risk-free rate is 4%. The expected return for the fad follower's portfolio is closest to:__________.
a. 11.5%
b. 13.6%
c. 16%
d. 12.4%

Business

1 answer:

harina [3.2K] · Answer 1 · 2026-03-18T08:51:33+03:00

a. 11.5% Explanation: Fad followers are investors who join trends as they appear, resulting in their betas being lower than that of informed investors, who make moves beforehand. By applying the Capital Asset Pricing Model for expected return calculation. Er = Rf + b( Rm - Rf) Er = Expected return Rf = Risk Free Rate b = Beta Rm = Market Return. The expected return for informed investors is, = 4% + 1.4 ( 10% - 4%) = 4% + 1.4 ( 6%) = 12.4% Given that fad followers have a lower beta, implying a lower expected return in comparison to informed investors, the only viable choice is 11.5%.