AN INVESTMENT ADVISOR IS ANALYZING THE RANGE OF POTENTIAL EXPECTED...

8.

An investment advisor is analyzing the range of potential expected returns of a new fund designed to repli-

cate the directional moves of the BSE Sensex Index but with twice the volatility of the index. The Sensex has

an expected annual return of 12.3% and volatility of 19.0%, and the risk free rate is 2.5% per year. Assuming

the correlation between the fund’s returns and that of the index is 1, what is the expected return of the fund

using the capital asset pricing model?

a.

18.5%

b.

19.0%

c.

22.1%

d.

24.6%

2015 Financial Risk Manager (FRM®) Practice Exam