Question

Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.45 .155 Repete Co. 1.14 .128 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market?

Answer 1

Expected return on the market = 11.58%

Step-by-step explanation:

MRP = Market risk premium

RFR = Risk free rate

ERM = Expected return on market

`MRP = (0.155-0.128)/(1.45-1.14)=(0.027)/(0.31)= 0.0871`

MRP = 8.71%

RFR = 0.155 - (1.45*0.0871) = 0.155 - 0.126295 = 0.0287

RFR = 2.87%

ERM = MRP + RFR = 8.71% + 2.87%

ERM = 11.58%

Hope this helps!