The risk-free rate as measured by the current T-Bill rates and during the recent past has...
The risk-free rate as measured by the current T-Bill rates and during the recent past has been 3.64%, while the market return on the S&P 500 was 11.12% last year. The beta on two securities we are considering adding to our portfolio are 1.12 for ABC and 0.85 for XYZ respectively.
- What is the rs of ABC?
- What is the rs of XYZ?
Homework Answers
Return as per CAPM = Risk free rate + beta*Market risk premium
or Expected return = Risk free rate + Beta*(Market Return – Risk free return)
Hence, return of ABC = 3.64% + 1.12*(11.12%-3.64%)
= 12.0176%
XYZ = 3.64% + 0.85*(11.12%-3.64%)
= 9.998%
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