Question

Assume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 16.0 percent. Given this information, determine the required rate of return for Security J for the coming year.

Answer 1

the answer is 7%

Step-by-step explanation:

If we estimate the beta as a proportion between the expected risk -free rate and the expected market value, we obtain 4%/16%=25%

b=0.25 r=?

r_m=0.16

r_ref=0.04

then we use the CAPM Model

r=r_ref +b(r_m-r_ref)

r= 0.04+0.25*(0.16-0.04)=0.07