The risk free rate is 2% and the market's risk premium is 6%. If the CAPM...

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Question

The risk free rate is 2% and the market's risk premium is 6%. If the CAPM holds, what is the beta of a security with a 12% expected return?

Answer 1

Answer #1

Risk free rate = R_f = 2%

Market risk premium = MRP = 6%

Expected return = E[R] = 12%

CAPM Equation:

E[R] = R_f + β*MRP

where β is the beta of the security

12% = 2% + β*6%

β = 10%/6% = 1.66667

Answer -> 1.67

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Answer 2

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