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?

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:**

Step 3

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

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