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1 Find the expected return on stock A2 Find the expected return o

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1.Find the expected return on stock A
2. Find the expected return on stock B
3. If the T-bill rate is 2 percent and market risk premium is
6 percent, what does CAPM say about the fair expected
rate of return on stock A? Assume that the beta of A is 1.5,
and beta of B is 1.1.
4. If the T-bill rate is 2 percent and market risk premium is
6 percent, what does CAPM say about the fair expected
rate of return on Stock B? Assume that the beta of A is
1.5, and beta of B is 1.1.
Solution
Expected Return = Returns xprobability
1. Expected Return on Stock A = (-5*0.4) + (15*0.4) +
(32*0.2)
= 10.4%
2. Expected Return on Stock B = (1*0.4) +(8*0.4) +
(20*0.2)
= 7.6%
3. Expected Rate of Return using CAPM = Risk free rate +
Beta x (Market risk premium)
Fair Expected Return on Stock A = 2 + 1.5 ( 6) = 11%
4. Fair Expected Return on Stock B = 2 + 1.1 ( 6) = 8.6%

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1.Find the expected return on stock A 2. Find the expected return on stock B 3. If the T-bill rate is 2 percent and market risk premium is 6 percent, what does CAPM say about the fair expected rate of return on stock A? Assume that the beta of A is 1.5, and beta of B is 1.1. 4. If the T-bill rate is 2 percent and market risk premium is 6 percent, what does CAPM say about the fair expected rate of return on Stock B? Assume that the beta of A is 1.5, and beta of B is 1.1. Solution Expected Return = Returns xprobability 1. Expected Return on Stock A = ( -5*0.4) + (15*0.4) + (32*0.2) = 10.4% 2. ...
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