Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

Security Beta Expected Return Pete Corp .0.8 0.12 Repete Corp. 1.1 0.16

Answers

is that all the question there

10.35%

Explanation:

The Capital Asset Pricing Model is used to calculate the expected return of a security with the expression

Expected return = Risk free rate + Beta ( Market return - risk free rate)

( Market return - risk free rate) is also known as the market premium and can be calculated by;

= frac{Expected return on A - Expected return on B}{Beta for A - Beta for B}

= frac{0.1137 - 0.0934}{1.16 - 0.92}

= 0.0153/0.24

= 6.375%

= 6.38%

Expected return A = Risk free rate + Beta A ( Market return - risk free rate)

0.1137 = Risk free rate + 1.16 (6.38%)

Risk free rate = 0.1137 - 1.16(6.38%)

Risk free rate = 3.97%

Market Expected return = Market Risk Premium + risk free rate

= 6.38% + 3.97%

= 10.35%

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts