Question

Manipulating CAPM???Use the basic equation for the capital asset pricing model ?(CAPM?) to work each of the following problems. a.??Find the required return for an asset with a beta of 0.810.81 when the? risk-free rate and market return are 99?% and 17 %17%?, respectively. b.??Find the ?risk-free rate for a firm with a required return of 12.98212.982?% and a beta of 1.891.89 when the market return is 10 %10%. c.??Find the market return for an asset with a required return of 8.4108.410?% and a beta of 0.560.56 when the? risk-free rate is 5 %5%. d.??Find the beta for an asset with a required return of 6.9506.950?% when the? risk-free rate and market return are 66?% and 8.5 %8.5%?, respectively. a.??The required return for an asset with a beta of 0.810.81 when the? risk-free rate and market return are 99?% and 17 %17%?, ?respectively, is nothing?%. ?(Round to two decimal? places.) b.??The? risk-free rate for a firm with a required return of 12.98212.982?% and a beta of 1.891.89 when the market return is 10 %10% is nothing?%. ?(Round to two decimal? places.) c. The market return for an asset with a required return of 8.4108.410?% and a beta of 0.560.56 when the? risk-free rate is 5 %5% is nothing?%. ?(Round to two decimal? places.) d.??The beta for an asset with a required return of 6.9506.950?% when the? risk-free rate and market return are 66?% and 8.5 %8.5%?, ?respectively, is nothing. ?(Round to two decimal? places.)

Answer 1

Security return=	Risk free return + Beta * (Market return - Security return)
Solution A
Security return=	9% + 0.81 * (17% - 9%)
Security return=	15.48%
Solution B
12.98%	=Risk free return + 1.89 * (10% -Risk free return)
12.98%	=Risk free return + 0.189 - 1.89*Risk free return)
18.90%-12.98%=	0.89* risk free return
Risk free return=	5.92%/0.89
Risk free return=	6.65%
Solution C
8.41%	= 5% + 0.56 * (Market return -5%)
8.41%/5%	=0.56 * (Market return -5%)
1.682	=0.56 * (Market return -5%)
1.682%/0.56	= (Market return -5%)
3.00%	= (Market return -5%)
Market return=	8%
Solution D
6.95%	= 6% + Beta * (8.5% -6%)
6.95%-6%	=Beta * 2.5%
0.95%	=Beta * 2.5%
Beta=	0.95%/2.5%
Beta=	0.38