Assume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 16.0 percent. Given this information, determine the required rate of return for Security J for the coming year.

Question

Aarav Pacheco

Business

18 May, 05:59

Assume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 16.0 percent. Given this information, determine the required rate of return for Security J for the coming year.

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Answers (1)

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Mylee Lee · Answer 1

the answer is 7%

Explanation:

If we estimate the beta as a proportion between the expected risk - free rate and the expected market value, we obtain 4%/16%=25%

b=0.25 r=?

r_m=0.16

r_ref=0.04

then we use the CAPM Model

r=r_ref + b (r_m-r_ref)

r = 0.04+0.25 * (0.16-0.04) = 0.07