Suppose you observe the following situation Beta 1.60 1.29 Expected Return Secur

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 rate

Explanation / 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

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