Assume that the financial markets are in equilibrium. Information on three particular stocks is provided in the table below. Find the risk free rate and the expected return on the market portfolio. $$\begin{array} { | c | c | c | }
\hline \text { Asset } & \begin{array} { c }
\text { Expected } \
\text { Return }
\end{array} & \text { Beta } \
\hline \text { A } & 7.6 \% & 0.2 \
\hline \text { B } & 12.4 \% & 0.8 \
\hline \text { C } & 15.6 \% & 1.2 \
\hline
\end{array}$$
A)5%, 14%
B)5%, 18%
C)6%, 14%
D)6%, 18%
E)7%, 16%

Question

Assume that the financial markets are in equilibrium. Information on three particular stocks is provided in the table below. Find the risk free rate and the expected return on the market portfolio. $$\begin{array} { | c | c | c | } 
\hline \text { Asset } & \begin{array} { c } 
\text { Expected } \
\text { Return }
\end{array} & \text { Beta } \
\hline \text { A } & 7.6 \% & 0.2 \
\hline \text { B } & 12.4 \% & 0.8 \
\hline \text { C } & 15.6 \% & 1.2 \
\hline
\end{array}$$
A)5%, 14%
B)5%, 18%
C)6%, 14%
D)6%, 18%
E)7%, 16%

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), we can set up equations for each stock:  1. 7.6% = Rf + 0.2(Rm - Rf)  2. 12.4% = Rf + 0.8(Rm - Rf)  3. 15.6% = Rf + 1.2(Rm - Rf)  Solving these equations simultaneously, we find Rf = 6% and Rm = 14%.

Assume That the Financial Markets Are in Equilibrium A)5%, 14% B)5%, 18% C)6%, 14% D)6%, 18% E)7%, 16

Assume That the Financial Markets Are in Equilibrium A)5%, 14%
B)5%, 18%
C)6%, 14%
D)6%, 18%
E)7%, 16