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# Capital-asset-pricing model

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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?

#### 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.

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