Question

Use the required return-beta equation from the CAPM.

1. What is the required return if the risk-free rate is 3%, beta 1.5 and the required return for the market portfolio is 8%?

2. What is the risk-free rate if beta is 1.1, the required return 8.4% and the required return for the market portfolio is 8%?

3. What is beta if the risk-free rate is 3%, the required return 10% and the required return for the market is 8%?

4. What is the required return for the market if the risk-free rate is 3%, beta 1.5 and the required return 10%?

Answer 1

1. The required return is computed as follows:

= risk free rate + beta x (return on market - risk free rate)

= 0.03 + 1.5 x (8% - 3%)

= 10.5%

2. The risk free rate is computed as follows:.

0.084 = risk free rate + 1.1 x (0.08 - risk free rate)

0.084 = risk free rate + 0.088 - 1.1 risk free rate

risk free rate = 4%

3. Beta is computed as follows:

0.10 = 0.03 + beta x (0.08 - 0.03)

Beta = 1.4

4. Return on market is computed as follows:

0.10 = 0.03 + 1.5 x (return on market - 0.03)

0.07 = 1.5 return on market - 0.045

return on market = 7.67% Approximately