Question

The risk-free rate is 3%. Asset A has beta of 0.8 and expected return of 11%. If asset B has expected return 15%, what must be the beta for Asset B?

Answer 1

We Will use Capital asset pricing model (CAPM) Equation, which is

E(r) = Rf + B (Rm - Rf)

Where, E(r) is expected return

Rf is Risk Free return

Rm is Market rerurn

And,( Rm - Rf) is Market Premium

We will calculate market return from given information of Asset A

Asset A,

E(r) = Rf + B (Rm - Rf)

11% = 3% + 0.8 (Rm - 3%)

11% - 3% = 0.8 (Rm - 3%)

8% / 0.8 = (Rm - 3%)

10% = (Rm - 3%)

Rm = 13%

So, The market return is 13%

Now, We will calculate the beta of asset B using market return of 13%

For Asset B,

E(r) = Rf + B (Rm - Rf)

15% = 3% + B ( 13% - 3%)

15% - 3% = B (10%)

12% = B (10%)

B = 12% /10%

B = 1.2

So, The beta of Asset B is 1.2