Sante Capital operates two mutual funds headquartered in? Houston, Texas. The fi

Question

Sante Capital operates two mutual funds headquartered in? Houston, Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of their? analysis, Sante's managers have asked their junior analyst to estimate the? investor-required rate of return on each? firm's shares using the CAPM and the following? estimates: The rate of interest on? short-term U.S. Treasury securities is currently 4 ?percent, and the expected return for the market portfolio is 12 percent. What should be the expected rates of return for each? investment? Security Beta A 1.62 B 0.82 C 1.41 D 0.74

Explanation / Answer

Expected return = Risk free rate + Beta* ( Return on market - risk free rate)

A) Expected return = 4 + 1.62*(12-4)=16.96

B) Expected return = 4 + 0.82*(12-4)=10.56

C) Expected return = 4 + 1.41*(12-4)=15.28

D) Expected return = 4 + 0.74*(12-4)=9.92

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