Answer to Question #264802 in Microeconomics for queen

Question #264802

The rate of return for a market portfolio of risky assets is 7.00%, and its corresponding beta is 2.50. In addition, a risk-free option has a return rate of 2.00%. According to the Capital Asset Pricing Model (CAPM), what expected rate of return (in percentage terms) should any risky asset offer?     (Round to two decimals, if necessary.)



1
Expert's answer
2021-11-14T17:34:19-0500

Under CAPM, the expected return on a security is equal to a risk premium determined by beta of the security, plus the risk free return .


"Expected Return = Risk Free Rate +(Beta * Market Risk Premium)"


Therefore


"Expected Return = 2.00\\% + (2.50 * 7.00\\%)"


"Expected Return = 19.5\\%"


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