8. Assume the risk-free rate is 6.7% and the expected return on the market portfolio is 7.8%. Use the capital asset pricingmodel (CAPM) to find the required return for each of the securities in the table here, 7.Review OnClick the icon to see the Worked Solution.The required return for investment A is%. (Round to one decimal place.)The required return for investment B is%. (Round to one decimal place.)The required return for investment C is%. (Round to one decimal place.)The required return for investment D is%. (Round to one decimal place.)The required return for investment E is%. (Round to one decimal place.)7: Data Table(Click on the icon herein order to copy its contents of the data table below into a spreadsheet.)SecurityBetaA1.34в0.930.130.96E0.67

Answered: Click the icon to see the Worked…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 9PROB

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Question

8. Assume the risk-free rate is 6.7% and the expected return on the market portfolio is 7.8%. Use the capital asset pricing
model (CAPM) to find the required return for each of the securities in the table here, 7.
Review On
Click the icon to see the Worked Solution.
The required return for investment A is
%. (Round to one decimal place.)
The required return for investment B is
%. (Round to one decimal place.)
The required return for investment C is
%. (Round to one decimal place.)
The required return for investment D is
%. (Round to one decimal place.)
The required return for investment E is
%. (Round to one decimal place.)
7: Data Table
(Click on the icon here
in order to copy its contents of the data table below into a spreadsheet.)
Security
Beta
A
1.34
в
0.93
0.13
0.96
E
0.67

Expert Solution

Step 1

Capital Asset Pricing Model (CAPM):

This model attempts to explain the relationship between the systematic risk and the expected return of the asset. It is generally used to determine the price and the expected return of the risky securities.

Step 2

Compute the required return for investment A using the equation as shown below:

$R e q u i r e d r e t u r n = R i s k - f r e e r a t e + (B e t a \times (E x p e c t e d r e t u r n o n m a r k e t - R i s k - f r e e r a t e)) = 6.7 % + (1.34 \times (7.8 % - 6.7 %)) = 6.7 % + (1.34 \times 1.1 %) = 8.17 %$

Hence, the required return is 8.17%.

Step 3

Compute the required return for investment B using the equation as shown below:

$R e q u i r e d r e t u r n = R i s k - f r e e r a t e + (B e t a \times (E x p e c t e d r e t u r n o n m a r k e t - R i s k - f r e e r a t e)) = 6.7 % + (0.93 \times (07.8 % - 6.7 %)) = 6.7 % + (0.93 \times 1.1 %) = 7.72 %$

Hence, the required return is 7.72%.

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