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12 August, 02:14

Suppose a mutual fund yielded a return of 14% last year. The risk-free rate was 5% last year and the stock market return was 10% last year. Its CAPM alpha (α) is 0. What is beta (β) for the mutual fund in the CAPM?

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  1. 12 August, 02:18
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    Beta is 1.8

    Explanation:

    CAPM or capital asset pricing model is used to compute expected return on stock by establishing relationship between expected returns and systematic risk (also called beta).

    Given:

    Return on mutual fund = 14%

    Risk free rate (Rf) = 5%

    Market return (Rm) = 10%

    Risk premium = Rm - Rf

    = 10% - 5%

    = 5%

    CAPM formula:

    Returns = Rf + β (Rp)

    14% = 5% + β (5%)

    β = 9 / 5

    β = 1.8

    Beta of mutual fund is 1.8
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