# Capital Asset Pricing Model (CAPM)

Use the CAPM to answer the following questions:

a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 12%, the Risk-Free Rate is 4%, and the Beta (b) for Asset "i" is 1.2.

b. Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 9%, the Expected Return on the Market Portfolio is 10%, and the Beta (b) for Asset "j" is 0.8.

c. What do you think the Beta of your portfolio would be if you owned half of all the stocks traded on the major exchanges? Explain.

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#### Solution Preview

Please see the attached file for solutions.

Use the CAPM to answer the following questions:

"CAPM (Capital Assets Pricing Model) states that the expected return on an asset is equal to risk free rate + beta of the asset x (return on market portfolio - risk free rate)

(return on market portfolio - risk free rate) is also known as market risk premium"

a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 12%, the Risk-Free Rate is 4%, and the Beta (b) for ...

#### Solution Summary

Solution uses CAPM to calculate returns.