Question

The CAPM holds and rRF=6%, rM=12%. What is ri for a security with βi=1.5? What is the beta of a security with r_A=13.2%?

Answer 1

Answer:

As per CAPM, Expected Return = Risk Free Asset + Beta * (Market Return - Risk Free Rate)
rRF = 6% or 0.06
rM = 12% or 0.12
Beta(βi) = 1.5
Expected Return = 0.06 + 1.5 * (0.12 - 0.06)
Expected Return = 0.06 + 1.5 * 0.06
Expected Return = 0.06 + 0.09
Expected Return = 0.15
Therefore, Ri is 15%

Expected Return = Risk Free Asset + Beta * (Market Return - Risk Free Rate)
rRF = 6% or 0.06
rM = 12% or 0.12
Expected Return on Asset (rA) = 13.2% or 0.132
Beta(βi) = ??
0.132 = 0.06 + Beta * (0.12 - 0.06)
0.132 = 0.06 + Beta * 0.06
0.072 = Beta * 0.06
Beta = 1.2