Asset A has a CAPM beta of 1.5. The covariance between asset A and asset B is 0.13. If the risk-free rate is 0.05, the expected market risk premium is 0.07, and the market risk premium has a standard...

Question

Question

Asset A has a CAPM beta of 1.5. The covariance between asset A and asset B is 0.13. If the risk-free rate is 0.05, the expect

Answer 1

Answer #1

Solution:

Beta = covariance / variance

Beta of B = 0.13/(0.25)^2 = 2.08

Risk free rate = 0.05

Expected market risk premium = 0.07

B's expected return under CAPM = Risk free rate + beta * expected market risk premium

B's expected return under CAPM = 0.05 + 2.08*0.07= 0.1956 or 19.56%

Answer 2

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