Question

The risk-free rate is 3.5%, and the expected return on the market is 10%. A publicly -traded bond promises a rate of return of 11%; the expected return on this bond is 8%. What is the bondʹs implied beta?

0.692

1.154

1.250

0.623

Answer 1

According to CAPM we have below equation

$K_{E}=R_{F}+\beta _{E}(R_{M}-R_{F})$

Where $K_{E}$ is expected return of bond

   $R_{F}$ is risk free return

   $R_{M}$ is expected return on market

  $\beta _{E}$ is beta of bond

In the given question $K_{E}$=8%, $R_{F}$=3.5%, $R_{M}$=10%

therefore

$8=3.5+\beta _{E}(10-3.5)$

$4.5=\beta _{E}(6.5)$

$\beta _{E}=\frac{4.5}{6.5}$

$\beta _{E}=0.692$