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​(Capital asset pricing model​) The expected return for the general market is 13.1 ​percent, and the...

​(Capital asset pricing model​)

The expected return for the general market is

13.1 ​percent, and the risk premium in the market is 7.6 percent.​ Tasaco, LBM, and Exxos have betas of

0.863​, 0.662​, and 0.554​, respectively. What are the corresponding required rates of return for the three​ securities?

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Homework Answers

Answer #1

Risk free rate is computed as shown below:

Risk premium = Return on market - risk free rate

7.6% = 13.1% - risk free rate

risk free rate = 5.5%

Return of Tasaco is computed as follows:

= risk free rate + beta x market risk premium

= 5.5% + 0.863 x 7.6%

= 12.0588%

Return of LBM is computed as follows:

= risk free rate + beta x market risk premium

= 5.5% + 0.662 x 7.6%

= 10.5312%

Return of Exxos is computed as follows:

= risk free rate + beta x market risk premium

= 5.5% + 0.554 x 7.6%

= 9.7104%

Feel free to ask in case of any query relating to this question      

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