Homework Answers
Expected return=risk free rate+beta*(market rate-risk free rate)
13.28=Rf+1.25*(Rm-Rf)
13.28=1.25*Rm-0.25Rf
Rm=(13.28+0.25Rf)/1.25
Also:
10.12=Rf+0.85*(Rm-Rf)
10.12=0.85*Rm+0.15Rf
10.12=0.85(13.28+0.25Rf)/1.25+0.15Rf
10.12=9.0304+0.17Rf+0.15Rf
Rf=(10.12-9.0304)/(0.17+0.15)
=3.405%=risk free rate
Rm=(13.28+0.25Rf)/1.25
=11.305%=market rate
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