Suppose you observe the following situation: |
Security |
Beta |
Expected Return |
||||
Pete Corp. |
1.30 |
.140 |
||||
Repete Co. |
.99 |
.113 |
||||
Expected return=risk free rate+beta*(market rate-risk free rate)
14=Rf+1.3*(Rm-Rf)
14=1.3*Rm-0.3Rf
Rm=(14+0.3Rf)/1.3
Also:
11.3=Rf+0.99*(Rm-Rf)
11.3=0.99Rm+0.01Rf
11.3=0.99*(14+0.3Rf)/1.3+0.01Rf
11.3=10.6615385+0.228461538Rf+0.01Rf
Rf=(11.3-10.6615385)/(0.228461538+0.01)
=2.68%(Approx)=risk free rate
Rm=(14+0.3Rf)/1.3
=11.39%(Approx)=market rate
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.30 .140 Repete Co....
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