The expected return for the general market is 12 percent, and the risk premium i

Question

The expected return for the general market is 12 percent, and the risk premium in the market is 7.9 percent. Tasaco, LBM, and Exxos have betas of 0.858, 0.607, and 0.518, respectively. What are the appropriate expected rates of return for the three securities?

The appropriate expected return of Tasaco is________% (Round to two decimal places)

The appropriate expected return of LBM is________% (Round to two decimal places)

The appropriate expected return of Exxos is________% (Round to two decimal places)

Explanation / Answer

Step-1: Finding the value of Rf (Risk free rate).

Return for the general market (Rm)=12%

Risk premium (Rm-Rf)=7.9%

Rf(Risk Free rate)=Rm-Risk Premium

=(12-7.9)%

=4.1%

Step-2:

The expected rate of return=Rf+Beta(Rm-Rf)

Tasaco=4.1%+.858*7.9%=10.88%

LBM=4.1%+.607*7.9%=8.90%

Exxos=4.1%+.518*7.9%=8.19%

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