Question

​(Capital asset pricing​ model)  ​Anita, Inc. is considering the following investments. The current rate on Treasury bills is

7

​percent, and the expected return for the market is

10.5

percent. Using the​ CAPM, what rates of return should Anita require for each individual​ security?

Stock	Beta
H	0.75
T	1.72
P	0.85
W	1.31

a.  The expected rate of return for security​ H, which has a beta of

0.75​,

is

nothing​%.

​(Round to two decimal​ places.)b.  The expected rate of return for security​ T, which has a beta of

1.72​,

is

nothing​%.

​(Round to two decimal​ places.)c.  The expected rate of return for security​ P, which has a beta of

0.85​,

is

nothing​%.

​(Round to two decimal​ places.)d. The expected rate of return for security​ W, which has a beta of

1.31​,

is

nothing​%.

​(Round to two decimal​ places.)

Answer 1

The expected rate of return of security is computed as follows:

= Risk free rate + Beta x (Return on market - risk free rate)

a. The expected return is computed as follows:

= 7% + 0.75 x (10.5% - 7%)

= 9.63%

b. The expected return is computed as follows:

= 7% + 1.72 x (10.5% - 7%)

= 13.02%

c. The expected return is computed as follows:

= 7% + 0.85 x (10.5% - 7%)

= 9.98%

d. The expected return is computed as follows:

= 7% + 1.31 x (10.5% - 7%)

= 11.59%

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