Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A to beta of B.
Assume that using the Security Market Line (SML) the required
Capital Asset Pricing Model (CAPM):
CAPM is the method of calculating the expected return on investment. The formula to calculate the expected return using the CAPM model is:
The required rate of return (RA) on stock A 1/2 return on stock B. The risk-free rate is 1/4 return on stock A. The market portfolio is RM.
Compute the beta of A (bA), using the equation as shown below:
Rearrange the above-mentioned equation to determine the beta of A as follows:
Hence, the beta of A (bA) is computed above.
Compute the beta of B (bB), using the equation as shown below:
Rearrange the above-mentioned equation to determine the beta of B as follows:
Hence, the beta of B (bB) is computed above.
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