Suppose you observe the following situation Beta 1.60 1.29 Expected Return Secur
ID: 2656875 • Letter: S
Question
Suppose you observe the following situation Beta 1.60 1.29 Expected Return Security Pete Corp. 170 143 Repete Co. Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return on market What is the risk-free rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rateExplanation / Answer
Expected return= risk-free rate +Beta*(MArket rate- risk-free rate )
Pete Corp:
17=Rf+1.6*(Rm-Rf)
17=1.6Rm-0.6Rf
Rm=(17+0.6Rf)/1.6
Repete Corp:
14.3=Rf+1.29*(Rm-Rf)
14.3=1.29Rm-0.29Rf
14.3=1.29*(17+0.6Rf)/1.6-0.29Rf
14.3=13.70625+0.48375Rf-0.29Rf
Rf=(14.3-13.70625)/(0.48375-0.29)
=3.06%(Approx)=risk free rate
Rm=(17+0.6Rf)/1.6
=11.77%(Approx)=market rate