Use the basic equation for the capital asset pricing model (CAPM) to work each o

ID: 2659610 • Letter: U

Question

Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems.

a. Find the required return for an asset with a beta of 0.90 when the risk-free rate and market return are 8% and 12%, respectively.

b. Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%.

c. Find the market return for an asset with a required return of 16% and a beta of 1.10 when the risk -free rate is 9%.

d. Find the beta for an asset with a required return of 15%. when the risk free rate and market return are 10% and 12.5% respectively.

*Please Show Work*

CAPM EQN : Return = Risk free Return + Beta*(Market Return - Risk free Rate)

A
8 + 0.9*(12-8) = 11.6%

Return = 11.6%

B
15 = rf + 1.25*(14 - rf)
15 = 17.5 - 0.25rf
rf = 10
Risk Free rate = 10%

C
16 = 9 + 1.1*(Mf - 9)
16 = 9 + 1.1Mf - 9.9
Mf = 15.36%
Market Return = 15.36%

D
15 = 10 + Beta*(12.5-10)
5 = Beta*2.5
Beta = 2

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