Suppose you observe the following situation: Expected Return 0.129 0.102 Securit

Question

Suppose you observe the following situation: Expected Return 0.129 0.102 Security Pete Corp Repete Co. Beta 1.15 0.84 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the 32.16) d your answer to 2 decimal places. (e.g., Expected return on market Pete Corp Repete Co. 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 References eBook & Resources Worksheet Leaming objective 13-04 The security

Explanation / Answer

Expected return=risk free rate+beta*(market rate-risk free rate)

0.129=Rf+1.15*(Rm-Rf)

0.129=1.15Rm-0.15Rf

Hence Rm=(0.129+0.15Rf)/1.15

Also:

0.102=Rf+0.84(Rm-Rf)

0.102=0.84Rm+0.16Rf

0.102=0.84(0.129+0.15Rf)/1.15+0.16Rf

0.102=0.094226086+0.109565217Rf+0.16Rf

Hence risk free rate=(0.102-0.094226086)/(0.109565217+0.16)

=2.88%(Approx)

Market rate=(0.129+0.15Rf)/1.15

=11.59%(Approx)

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