# Capital-asset-pricing model

Consider the following two stocks:

Beta Expected Return

Merck Pharmaceutical 1.4 25%

Pizer Drug Corp 0.7 14%

Assume the capital-asset-pricing model holds. Based on the CAPM, what is the risk-free rate? What is the expected return on the market portfolio?

https://brainmass.com/business/capital-asset-pricing-model/capital-asset-pricing-model-99074

#### Solution Preview

Consider the following two stocks:

Beta Expected Return

Merck Pharmaceutical 1.4 25%

Pizer Drug Corp 0.7 14%

Assume the capital-asset-pricing model holds. Based on the CAPM, what is the risk-free rate? What is the expected return on the market portfolio?

CAPM (Capital Asset Pricing Model equation is:

r A= r f + beta A (r m - r f)

For Merck

25% = rf + ...

#### Solution Summary

The solution calculates risk-free rate and the expected return on the market portfolio using CAPM (capital-asset-pricing model) and given betas and expected returns of two stocks.