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Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model:

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Answer:        ER(P) = Rf  + β(Rm - Rf)

                     ER(P) = 7    + 1(13-7)

                     ER(P) = 7    +  6    

                     ER(P) = 13%                  

Explanation:  According to capital asset pricing model, the expected return on a portfolio is a function of risk free rate and market risk premium. Market risk premium is the product of Beta(market risk) and risk premium ie β(Rm-Rf)

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