Chrome File Edit View History Bookmarks People Window Help O 5 12% DO Tue 9:58 A

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Chrome File Edit View History Bookmarks People Window Help O 5 12% DO Tue 9:58 AM Q = E Student Home - Blackboare x 6 Quiz 21 XO BADM 300 group project -- X Y A share of stock with a beta x C Finance Archive April 21, 2 x 5 Macie + C & O ezto.mheducation.com/hm.tpx * : E Connect FINA 307: Fall 2017 Macie Beltran FINA 307: Fall 2017 Macie Beltran É CO FINANCE Quiz 21 instructions I help Question 5 (of 10) Save & Exit Submit 5. value: 10.00 points Stock A has a beta of .8, and investors expect it to retum 14%. Stock B has a beta of 1.2, and investors expect it to return 18%. Use the CAPM to calculate the market risk premium and the expected rate of return on the market. (Do not round intermediate calculations. Enter your answers as a whole percent.) Market risk premium Expected market rate of return References Worksheet Difficulty: Intermediate Leaming Objective: 12-02 Relate the market risk of a security to the rate of return that investors demand. Check my work 9OOIDA A IIZTOQ BOM A 90 w EEU

Explanation / Answer

Stock A beta = 0.8

Stock A return = 14%

14% = Risk Free Rate + 0.8 * Market Risk Premium ........................(1)

Stock B beta = 1.2

Stock B return = 18%

18% = Risk Free Rate + 1.2 * Market Risk Premium ........................(2)

Subtracting 1 from 2

4% = 0.4 * Market Risk Premium

Market Risk Premium = 10%

Putting value of Market risk premium in equation 1

14% = Risk Free Rate + 0.8 * 10%

Risk Free Rate = 6%

Expected Market Rate of Return - Risk Free Rate = 10%

Expected Market Rate of Return = 10% + 6%

Expected Market Rate of Return = 16%

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