5.If the expected return on State Farm from the Capital Asset Pricing Model (the
ID: 2765290 • Letter: 5
Question
5.If the expected return on State Farm from the Capital Asset Pricing Model (the CAPM) is 0.20, and if the risk free rate of interest is 0.05, and if the expected return on the market portfolio is 0.20, then which of the following comes closest to State Farm’s beta?
A. 0.50
B. 0.00
C. 1.50
D. 1.00
6. From CAPM, a stock with a beta equal to zero has an expected return equal to what?
One-half the expected return on the market portfolio.
The difference between the risk free rate of return and the market portfolio.
The risk-free rate of return.
The expected return on the market.
PLEASE ANSWER ALL QUESTIONS
A.One-half the expected return on the market portfolio.
B.The difference between the risk free rate of return and the market portfolio.
C.The risk-free rate of return.
D.The expected return on the market.
Explanation / Answer
5. Capital-asset pricing model (CAPM)
E(R)= Rf + B (Rm – Rf)
Where E(R)= Expected return = 0.20
Rf = Risk free rate of interest = 0.05
B = Beta
Rm= Expected return on the market
Putting all the above values we get,
0.20 = 0.05 + B( 0.20 – 0.05)
0.20 = 0.05 + B(0.15)
B(0.15) = 0.20 – 0.05
B = 0.15/0.15 =1
Answer : D ) 1.00
6. Putting beta = 0 in the above equation we get,
E(R)= Rf + 0 x (Rm – Rf)
E(R)= Rf
From CAPM, a stock with a beta equal to zero has an expected return equal to
Answer : C) The risk-free rate of return.
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