Use the basic equation for the capital asset pricing model (CAPM) to work each o

Question

Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems.

a. Find the required return for an asset with a beta of 0.77 when the risk-free rate and market return are 7% and 15%, respectively.

b. Find the risk-free rate for a firm with a required return of 6.245% and a beta of .59 when the market return is 8%.

c. Find the market return for an asset with a required return of 7.627% and a beta of .26 when the risk -free rate is 7%

d. Find the beta for an asset with a required return of 11.972%. when the risk free rate and market return are 10% and 12.9% respectively. *Please Show Work*

Explanation / Answer

Required rate of retunr = Risk free rate + Beta * (Required market return - Risk free rate)

a. R = 7% + 0.77 * (15%-7%) = 13.16%

b. 6.245% = Rf + 0.59 * (8% - Rf)

                = Rf + 0.59*8% - 0.59*Rf

    6.245% - 4.72% = (1-0.59)*Rf

   1.525% / 0.41 = Rf

    Rf = 3.72%

c. 7.627% = 7% + 0.26*(Rm-7%)

   2.41% = Rm - 7%

Rm = 9.41%

d. 11.972% = 10% + Beta * (12.9% - 10%)

1.972% = Beta * 2.9%

Beta = 0.68

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