Question

The Treasury bill rate is 6%, and the expected return on the market portfolio is 14%. According to the capital asset pricing model:

a. What is the risk premium on the market?
b. What is the required return on an investment with a beta of 1.4? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
c. If an investment with a beta of 0.6 offers an expected return of 8.4%, does it have a positive or negative NPV?
d. If the market expects a return of 11.6% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

A. Risk premium on the market = Rm - Rf = 14% - 6% = 8%

B. Required return = Rf + beta * ( Risk premium on the market) = 6 + 1.4 * 8 = 17.20%

C. Required return = Rf + beta * ( Risk premium on the market) = 6 + 0.60 * 8 = 10.8%

Since Expected retrun < required retrun therefor NPV will be positive.

D. Required return = Rf + beta * ( Risk premium on the market)

11.6 = 6 + beta * 8

beta = 5.6/8 = 0.70

For any clarification comment.

Please thumps up, Thank you