suppose that annualized expected risk free rate=3.8% and annual expected market

Question

suppose that annualized expected risk free rate=3.8% and annual expected market return=13%.Consider two risky aseets J and H with the following required rates of return and beta coefficients. Risky asset J Risky asset H Require ROR 3.8%+dj 3.8%+dh Beta 1.5 2.0 Intruction: In order to solve for a, use the fact that the reward-to-risk measure are the same at the stock market equilibrium. There is an alternative way to solve this problem using simply the CAPM formula. But do not use the CAPM formula for this problem. a)How do you call a (the name for it)?(note that a=the compensation for risk from the uncertainty in future return because the risky asset J has this additional return part above risk free rate.) b)Calculate the value of risk premiums on the Risky asset J and H. c)what is the relation between the size of risk and the value of risk premium (positive or inverse relattion)

Explanation / Answer

expected rate of return=risk free+(market return-risk free)beta. =.038+1.5(.13-.038) =.176=17.6%

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