Question

Manipulating CAPM Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems a. Find the required return for an asset with a beta of 1.04 when the risk free rate and market return are 4% and 9%, respectively b. Find the risk-free rate for a firm with a required return of 7 530% and a beta of 0.39 when the market return is 10% C. Find the market return for an asset with a required return of 13.466% and a hata of 0.53 when the risk-free rate is 10% d. Find the beta for an asset with a required return of 8.067% when the free rate and market return are 4% and 8.9% respectively a. The required return for an asset with a beta of 1,04 when the risk free rate and market return are 4% and 9%, respectively, is (Round to two decimal places) b. The risk-free rate for a firm with a required return of 7.530% and a beta of 0.39 when the market return is 10% is %. (Round to two decimal places.) c. The market return for an asset with a required retum of 13.466% and a beta of 0.53 when the risk free rate is 10% is % (Round to two decimal places) d. The beta for an asset with a required return of 8067% when the risk free rate and market return are 4% and 8.9%, respectively, is (Round to two decimal places)

Answer 1

Answer of Part a:

Required Return = Risk Free Rate + Beta * (Market Return – Risk free rate)
Required Return = 0.04 + 1.04 * (0.09 – 0.04)
Required Return = 0.04 + 1.04 * 0.05
Required Return = 0.04 + 0.052
Required Return = 0.092 or 9.2%

Answer of Part b:

Required Return = Risk Free Rate + Beta * (Market Return – Risk free rate)
0.0753 = Risk Free Rate + 0.39 * (0.10 – Risk free rate)
0.0753 = Risk Free Rate + 0.39 * 0.10 – 0.39 * risk free rate
0.0753 = risk free rate + 0.039 – 0.39 * risk free rate
0.0753 – 0.039 = risk free rate – 0.39 risk free rate
0.0363 = 0.61 risk free rate
Risk Free Rate = 0.0363 / 0.61
Risk free rate = 0.0595 or 5.95%

Answer of Part c:

Required Return = Risk Free Rate + Beta * (Market Return – Risk free rate)
0.13466 = 0.1 +0.53 * (Market Return – 0.10)
0.13466 – 0.1 = 0.53 Market Return – 0.053
0.0347 = 0.53 Market Return – 0.053
0.0347 + 0.053 = 0.53 Market Return
0.0877 = 0.53 Market Return
Market Return = 0.0877 / 0.53
Market Return = 0.1655 or 16.55%

Answer of Part d:

Required Return = Risk Free Rate + Beta * (Market Return – Risk free rate)
0.08067 = 0.04 + Beta * (0.089 – 0.04)
0.08067 = 0.04 + 0.049 * Beta
0.08067 – 0.04 = 0.049 * Beta
0.04067 = 0.049 * Beta
Beta = 0.04067 / 0.049
Beta = 0.83