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Stock A has a beta of 0.5, and investors expect it to return 3%. Stock B has a beta of 1.5, and investors expect it to return 5%. Use the CAPM to calculate the market risk premium and the expected rate of return on the market. (Enter your answers as a whole percent.)
Market Risk Premium : ____ %
Expected market rate of return ___ %

Respuesta :

The expected price of go back and the market risk top rate available on the market is 7% and 4% respectively

In this query, we follow the Capital Asset Pricing version (CAPM) method which is shown beneath

Anticipated rate of return = chance-free price of return + Beta × (marketplace charge of go back - hazard-free charge of return)

Allow us to assume danger unfastened-fee of go back be X

And, the market charge of go back be Y

For stock A

5% = risk-free fee of go back + zero.5 × (marketplace charge of go back - hazard-unfastened fee of go back)

five% = X + zero.5 × (Y - X)

5% = zero.5X + zero.5Y

For stock B

nine% = risk-unfastened price of go back + 1.5 × (market charge of go back - chance-loose rate of return)

nine% = X + 1.five × (Y - X)

nine% = -zero.5X + 1.5Y

with the aid of comparing the equations,

For Stock A

5% = Risk-free rate of return + 0.5 × (Market rate of return - Risk-free rate of return)

5% = X + 0.5 × (Y - X)

5% = 0.5X + 0.5Y

For Stock B

9% = Risk-free rate of return + 1.5 × (Market rate of return - Risk-free rate of return)

9% = X + 1.5 × (Y - X)

9% = -0.5X + 1.5Y

By comparing the equations,

14% = 2Y

Y = 7%

And, X equals to

5% = 0.5X + 3.5%

1.5% = 0.5X

X = 3%

So, expected rate of return is 7%

And the market risk premium

= 7% - 3%

= 4%

Learn more about market risk risk here : https://brainly.com/question/23969100

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