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Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.45 .155 Repete Co. 1.14 .128 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market?

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Answer:

Expected return on the market = 11.58%

Explanation:

MRP = Market risk premium

RFR = Risk free rate

ERM = Expected return on market

[tex]MRP = \frac{0.155-0.128}{1.45-1.14}=\frac{0.027}{0.31}= 0.0871[/tex]

MRP = 8.71%

RFR = 0.155 - (1.45*0.0871) = 0.155 - 0.126295 = 0.0287

RFR = 2.87%

ERM = MRP + RFR = 8.71% + 2.87%

ERM = 11.58%

Hope this helps!

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