Ask Question
23 July, 22:34

Assume that the CAPM holds. One stock has an expected return of 8% and a beta of 0.5. Another stock has an expected return of 13% and a beta of 1.5. Part 1 IB - Attempt 1/10 for 10 pts. What is the expected return on the market?

+5
Answers (1)
  1. 23 July, 23:42
    0
    10.5%

    Explanation:

    In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

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

    For one stock

    8% = Risk-free rate of return + 0.5 * (Market rate of return - Risk-free rate of return)

    8% = Risk-free rate of return + 0.5 * Market rate of return - 0.5 * Risk-free rate of return

    8% = 0.5 * Risk-free rate of return + 0.5 * Market rate of return

    8% : 0.5 = Risk-free rate of return + Market rate of return

    So, Risk-free rate of return + Market rate of return = 16

    Risk-free rate of return = 16 - Market rate of return - 1

    For another stock

    13% = Risk-free rate of return + 1.5 * (Market rate of return - Risk-free rate of return)

    13% = Risk-free rate of return + 1.5 * Market rate of return - 1.5 * Risk-free rate of return

    13% = - 0.5 * Risk-free rate of return + 1.5 * Market rate of return - 2

    Now put these equations together

    13% = - 0.5 * (16 - Market rate of return) + 1.5 * Market rate of return

    13% = - 8 + 0.5 * Market rate of return + 1.5 * Market rate of return

    So, Market rate of return would be

    = 21 : 2

    = 10.5%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Assume that the CAPM holds. One stock has an expected return of 8% and a beta of 0.5. Another stock has an expected return of 13% and a ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers