Stock A has a beta of .5, and investors expect it to return 5%. Stock B has a be

Question

Stock A has a beta of .5, and investors expect it to return 5%. Stock B has a beta of 1.5, and investors expect it to return 12%. Use the CAPM to find the expected rate of return and the market risk premium on the market. (Do not round intermediate calculations. Round your answers to 1 decimal place.)

Stock A has a beta of .5, and investors expect it to return 5%. Stock B has a beta of 1.5, and investors expect it to return 12%. Use the CAPM to find the expected rate of return and the market risk premium on the market. (Do not round intermediate calculations. Round your answers to 1 decimal place.)

Explanation / Answer

risk free rate = rf

market risk premium = rm

for stock A

5% = rf + 0.5 * rm

for stock B

12% = rf + 1.5 * rm

so

expected rate of return on market = 1.5%

market risk premium = 7%

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