Question

7) Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on the CAPM. If the risk free rate of return is 4.2%, the expected return on the market portfolio is

A) 21%.

B) 19.2%.

C) 13.4%.

D) 10.2%.

8) Decker Corp. common STOCKhas a required return of 17.5% and a beta of 1.75. If the expected risk free return is 3%, what is the expected return for the market based on the CAPM?

A) 11.29%

B) 14.29%

C) 13.35%

D) 15.27%

Please provide detail explanations.

Answer 1

Note: As per HOMEWORKLIB POLICY, only single question per post is required to be answered. Please post the unrelated question 8 in a separate post. Please drop a line if you face nay challenge in the solution given for Ques 7.

Beta = 1.8

Required return Re = 15%

Risk free return Rf = 4.2%

Expected return on market portfolio = Rm

As per CAPM:

Re = Rf + Beta * (Rm – Rf)

15% = 4.2% + 1.8 * (Rm – 4.2%)

15% - 4.2% = 1.8 * (Rm – 4.2%)

10.8% = 1.8 * (Rm – 4.2%)

(Rm – 4.2%) = 6%

Rm = 6% + 4.2% = 10.2% (Option D)

Answer 2

Surf and Spray Inc. has a beta equal to 0.8 and a required return of 15% based on the CAPM. If the market risk premium is 7.5%, the risk-free rate of return is