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Stock A has a beta of 0.4, and investors expect it to return 10%. Stock B...

Stock A has a beta of 0.4, and investors expect it to return 10%. Stock B has a beta of 1.6, and investors expect it to return 16%. Use the CAPM to calculate the market risk premium and the expected rate of return on the market. (Enter your answers as a whole percent.)

Market risk premium %
Expected market rate of return      %
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Answer #1

As per CAPM. Expected Rate of return = Risk free rate + beta*market risk premium

10% = Risk free rate + 0.4*Market Risk premium ...................(1)

16% = Risk free rate + 1.6*Market Risk premium.................(2)

Subtracting (1) from (2)

6% = 1.2*Market risk premium

5% = Market risk premium

Risk free rate = 8%

Market beta = 1

Hence, expected market rate of return = 8%+1*5%

= 13%

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Answer #2

how did you get the 8% risk free rate ...  need just a frmula :)  

source: has none
answered by: Bob
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