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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?

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    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.

    $2.19

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