Assume these securities are correctly priced. Based on the CAPM, what is the exp

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Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?

Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

As per CAPM , r = rf+beta*(rm-rf)

So 11.6 = rf+(1.2)*(rm-rf)

9.8= rf+0.7*(rm-rf)

Solving above two

Rm-rf= 1.8/0.5

So substitute in any equation

9.8 = RF+ 0.7*1.8/0.5rf= 9.8-2.52 = 7.28

RM=1.8/0.5 +7.28 =10.88%

So expected market return = 10.88% & risk free rate = 7.28

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