Question
Asked Apr 3, 2019
123 views

Suppose you observed the following situation:

 

Security Beta Expected Return

 

Cooley, Inc. 1.6 19%

 

Moyer Co. 1.2 16%

 

What would the risk-free rate have to be if these securities are correctly priced?

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Expert Answer

Step 1

Calculation of Risk Free Rate:

The risk free rate can be calculated using the CAPM. Follow the below the steps to find the risk free rate.

Step 2

The formula to calculate the expected return using CAPM for the stocks is shown below:

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Step 3

Subtracting the above two formulas of Cooley Inc and Moyer Inc we get...

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