Suppose you observe the following situation: Security Beta Expected Return Pete

ID: 2742708 • Letter: S

Question

Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.45 .155 Repete Co. 1.14 .128 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16)) Expected return on market $ 2.85 % What is the risk-free rate? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Risk-free rate %

Explanation / Answer

RISK FREE RATE

0.155-rf /1.45 = 0.128 -rf /1.14

1.14(0.155-rf) = 1.45(0.128-rf)

0.1767 - 1.14rf = 0.1856 - 1.45rf

0.31rf = 0.0089

r f = 0.02871

Therefore , Expected return on market =

From CAPM r = RFR + Beta*(MR-RFR)

Pete Corp =

0.155 = 0.028 + 1.45(MR-0.028)

0.155 = 0.028+1.45MR-0.0406

MR = 0.1676