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

ID: 375096 • Letter: U

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.

a. Beta = 1.22

Rf= 6%

Rm= Market return = 9%

Re = expected return= not known

Re = Rf + Beta(Rm-Rf)

=6 + 1.22*3 = 9.66%

b) Re = Rf + Beta(Rm-Rf)

15.558 = Rf + .93(16 - Rf)

Rf = 9.69%

c) Re = Rf + Beta(Rm-Rf)

10.875 = 3 + 1.84*(Rm-3)

Rm= 7.28%

d) Re = Rf + Beta(Rm-Rf)

14.032 = 10 + Beta*(17.2-10)

Beta = .56

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