1,) The market risk premium is 10.00 percent, and the risk-free rate is 4.80 per

Question

1,) The market risk premium is 10.00 percent, and the risk-free rate is 4.80 percent. If the expected return on a bond is 10.86 percent, what is its beta? (Round answer to 2 decimal places, e.g. 15.25.)

2.) In February 2011 the risk-free rate was 4.10 percent, the market risk premium was 7.00 percent, and the beta for Dell stock was 1.50. What is the expected return that was consistent with the systematic risk associated with the returns on Dell stock? (Round answer to 2 decimal places, e.g. 17.54%.)

Explanation / Answer

As per the CAPM model:

Expected return on stock = Risk-free rate + beta (Market risk premium)

1. The market risk premium is 10.00 percent, and the risk-free rate is 4.80 percent. If the expected return on a bond is 10.86 percent,

0.1086 = 0.048 + Beta (0.10)

Beta = (0.1086 - 0.048)/0.10 = 0.60

2. risk-free rate was 4.10 percent, the market risk premium was 7.00 percent, and the beta for Dell stock was 1.50.

Expected return = 0.041 + 1.50(0.07) = 0.146 or 14.6%

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