Question

Question 6 (1 point) A stock has a beta of 2.4, the market expected return is 8% and the riskfree rate is 2%. What is the expected rate of return according to CAPM? Express your answer as a percentage, for example 3.18% should be entered as 3.18 without the percentage sign. Your Answer: Answer Question 7 (1 point) Suppose the covariance between the returns of the stock GHI and the returns to the market is 0.00064 and the standard deviation of market returns is 0.030. What is the beta of the stock? (Note: Here the actual numbers rather than percentages are given. So give your answer as an actual number rather than a percentage etc.) Your Answer:

Answer 1

6)
Under the Capital Asset pricing model (CAPM)
Rs = Rf + Beta*(Rm-Rf)
Rs is the expected return on the stock
Rf is the risk free rate that is 2%.
Rm is the return on the market that is 8%.
The Beta is 2.4.
Rs	.02 + 2.4*(.08 - .02)
Rs	0.164
The expected rate of return according to the CAPM is 16.4%.
16.4.
7)
Beta of stock I = Cov (Ri,Rm)/Var(Rm)
where cov (Ri,Rm) is the covariance between the stock returns and the market returns.
Cov (Ri,Rm)	0.00064
Var(Rm) is the variance of the market returns.
Standard deviation of market returns	0.03
Variance of market returns	(Standard deviation of market returns)^2
Variance of market returns	(.03)^2
Variance of market returns	0.0009
Beta of the stock	.00064/.0009
Beta of the stock	0.711111
The Beta of the stock is .711111.