Homework: Homework Two Save Score: 0 of 2 pts 8of10(Ocomplete) Hw Score: 0%, 0 o

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Homework: Homework Two Save Score: 0 of 2 pts 8of10(Ocomplete) Hw Score: 0%, 0 of 20 pts B8-16 (book/static) E Question Help (Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston, Texas. The firm is evaluating the stock of four different firms short-term U.S. Treasury secunities is currently 3.5 percent, and the expected return for the market for possible inclusion in its fund holdings. As part of their Sante's managers have asked their junior analyst to estimate the investor-required rate of the investor-required rate of return on each firms shares using the CAPM and the following estimates: T portfolio is 8.5 percent. What should be the expected rates of return for each investment? he rate of interest on Security Beta 1.60 0.55 1.10 0.90 a The expected rate of return for security A, which has a beta of 1.60, is % Round to two decimal places ) Enter your answer in the answer box and then click Check Answer Clear All Check Answor

Explanation / Answer

Using CAPM expected rate of return = risk free rate + beta*(return on market portfolio - risk free rate)

= 3.5% + 1.6* (8.5 - 3.5)%

= 11.5%

For security B

= 3.5% + .55* (8.5 - 3.5)%

= 6.25%

For Security C

= 3.5% + 1.1* (8.5 - 3.5)%

= 9%

For security D

= 3.5% + .9* (8.5 - 3.5)%

= 8%

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