Asset A has a required return of 18% and a beta of 1.4. The expected market return is 14%

Asset A has a required return of 18% and a beta of 1.4. The expected market return is 14%. What is the risk-free rate? Plot the security market line.

Answer:  

K = Krf + (Km - Krf)b

18% = X + (14% - X)1.4

18% - X =19.6% - 1.4X

.4X = 1.6%

X = 4% = Risk - free Rate = Krf

The return for the market during the next period is expected to be 11.5%; the risk-free rate is 2.5%. Calculate the required rate of return for a stock with a beta of 1.5.

Answer: 

K = 2.5% + 1.5(11.5% - 2.5%) = 16%

Security A has an expected rate of return of 22% and a beta of 2.5. Security B has a beta of 1.20. If the Treasury bill rate is 2.0%, what is the expected rate of return for security B?

Answer: 

RA = RF + BA(Rm - Rf)

.22 = .02 + 2.5 (Rm - .02)

.20 = 2.5 (Rm - .02) = 2.5 Rm - .05

.25 = 2.5 Rm 

.10 = Rm 

RB = Rf + BB(Rm - Rf)

RB = .02 + 1.20(.10 - .02)

RB = .116 or 11.6%

AA & Co. has a beta of .656. If the expected market return is 13.2% and the risk-free rate is 5.7%, what is the appropriate required return of AA & Co. using the CAPM model?

Answer:  Required Rate of Return = Risk-Free Rate + (Market Return - Risk-Free Rate) × Beta = 5.7% + (13.2% - 5.7%) × 0.656 = 10.62%