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

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 1.22 when the risk-free rate and market return are 6% and 9%, respectively.

b.Find the risk-free rate for a firm with a required return of 15.558% and a beta of 0.93 when the market return is 16%.

c.Find the market return for an asset with a required return of 10.875% and a beta of 1.84 when the risk-free rate is 3%.

d.Find the beta for an asset with a required return of 14.032% when the risk-free rate and market return are 10% and 17.2%, respectively.

Explanation / Answer

Required return=Risk free rate+Beta*(MArket rate-risk free rate)

1.Required return=6+1.22*(9-6)=9.66%

2.0.15558=Rf+0.93*(0.16-Rf)

(0.15558-0.1488)/(1-0.93)=Rf=9.69%(Approx)

3.10.875=3+1.84*(Rm-3)

Rm=(10.875-3)/1.84+3=7.28%

4.

14.032=10+Beta*(17.2-10)

Hence beta-(14.032-10)/(17.2-10)=0.56

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.