Question

consider betas given risk free rate 2.13% market risk premium 8.6% what is expected rate of return

Answer 1

rate of return on a security is equal to = risk free rate + Beta*(Market return- risk free rate)

Now market risk premium is equal to = (market return- risk free rate)

Now risk-free rate = 2.13%

Market risk premium (market return-risk free rate) = 8.6%

Security C beta = 1.25

So, security C required rate = 2.13 + 1.25* = 12.88%

Security K beta = 0.95

So, security K required rate = 2.13 + 0.95* = 10.30%

Now to calculate the market return, we use the formula Market risk premium (Market return- risk free rate)

8.6 = Market return - 2.13

Market return= 8.6 + 2.13

= 10.73

So, the expected return from the market is

10.73%