The expected return on security with a beta of 1.2 is closest to:

johnpaech

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6 years ago

The expected return on security with a beta of 1.2 is closest to:

The expected return on security with a beta of 1.2 is closest to:
A) 4.8%
B) 8.0%
C) 8.8%
D) 9.6%

Textbook

Corporate Finance: The Core

Edition: 4^th

Authors: Berk, DeMarzo

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deusmaroto

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6 years ago

C
Explanation: C) Security "Z" is the risk-free asset since its return is constant regardless of the market. Therefore the risk-free rate is the return on security Z which is 4%. The expected return on the market rate is .50(24%) + .50(-8%) = 8%. Using the CAPM, the return on this security is .04 + 1.2(.08 - .04) = 8.8%

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