The Treasury bill rate is 7%, and the expected return on the market portfolio is

Question

The Treasury bill rate is 7%, and the expected return on the market portfolio is 11%. According to the capital asset pricing model:

a. What is the risk premium on the market? (in precentage)

b. What is the required return on an investment with a beta of 1.6? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

d. If the market expects a return of 11.6% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Explanation / Answer

a. Risk premium = 11% - 7% = 4%

b. Required return = Risk free rate + Beta(Market return - Risk free rate) = 7% + 1.6(11% - 7%) = 13.4%

d. Required return = Risk free rate + Beta(Market return - Risk free rate)

0.116 = 0.07 + Beta(0.11 - 0.07)

0.116 = 0.07 + Beta(0.04)

0.116 - 0.07 = Beta(0.04)

0.046 = Beta(0.04)

Beta = 1.15

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