Capital Asset pricing model:
As per CAPM model:
Re= Rf+(Rm-Rf)B
Re= required rate of return.
Rf= Risk-free rate.
Rm =Market Risk Premium.
B = Beta, systematic risk.
By solving the equations, we get:
Rm = 5.5%
Rf= 2.5%
3. Firm X and Y each have a beta of 1.5 and 2.5. If their expected...
Firm X and Y each have a beta of 1.5 and 2.5. If their expected return (cost of equity) are each estimated to be 7% and 10% under CAPM, what is the assumed expected market return and risk-free rate?
(CAPM) A firm has a beta of 1.5. If expected market return is 5.5% and risk-free rate is 2%, what is the cost of equity? Show formula and work by hand-only. Do not use excel.
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