Stock A has a beta of 0.4, and investors expect it to return 10%. Stock B...
Stock A has a beta of 0.4, and investors expect it to return 10%. Stock B has a beta of 1.6, and investors expect it to return 16%. Use the CAPM to calculate the market risk premium and the expected rate of return on the market. (Enter your answers as a whole percent.)
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Homework Answers
As per CAPM. Expected Rate of return = Risk free rate + beta*market risk premium
10% = Risk free rate + 0.4*Market Risk premium ...................(1)
16% = Risk free rate + 1.6*Market Risk premium.................(2)
Subtracting (1) from (2)
6% = 1.2*Market risk premium
5% = Market risk premium
Risk free rate = 8%
Market beta = 1
Hence, expected market rate of return = 8%+1*5%
= 13%
how did you get the 8% risk free rate ... need just a frmula :)
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