Stock A has a beta of .8, and investors expect it to return 9%. Stock B has a be

Question

Stock A has a beta of .8, and investors expect it to return 9%. Stock B has a beta of 1.2, and investors expect it to return 13%. Use the CAPM to find the expected rate of return on market and the market risk premium. (Do not round intermediate calculations. Round your answers to 1 decimal place.)

Stock A has a beta of .8, and investors expect it to return 9%. Stock B has a beta of 1.2, and investors expect it to return 13%. Use the CAPM to find the expected rate of return on market and the market risk premium. (Do not round intermediate calculations. Round your answers to 1 decimal place.)

Explanation / Answer

Expected Return = Rf + B(Rm-Rf) Stock A= 9= Rf+0 .80(Rm-Rf) Stock B= 13=Rf+1.20(Rm-Rf) 13=Rf+1.20(Rm-Rf) 9= Rf+0 .80(Rm-Rf) 4= 0.40(Rm-Rf) Rm-Rf =10% Putting the value into the equation Stock A= 9= Rf+0.80(.10) 8.92 Stock B= 13= Rf+1.20(.10) 12.88

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