Question

1. a) If the CAPM is correct, what would be the expected return of a risky asset with a beta of 1.2, given a risk free rate of 3% and an expected market risk premium of 4.5%?

b) If the CAPM is correct, what would be the expected return of a risky asset with a beta of 0.8, given a risk free rate of 4% and an expected return of the market of 9%

Answer 1

Ans a) 8.40%

Expected Return =	Risk free Return + (Market Return - Risk free return)* Beta
Expected Return =	3% + 4.5% * 1.2
Expected Return =	8.40%

Ans b) 8.00%

Expected Return =	Risk free Return + (Market Return - Risk free return)* Beta
Expected Return =	4% + (9% - 4%)*0.80
Expected Return =	8.00%