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CAPM and Expected Return

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CAPM and Expected Return. Stock A has a beta of .5 and investors expect it to return 5 percent. Stock B has a beta of 1.5 and investors expect it to return 13 percent. Use the CAPM to find the market risk premium and the expected rate of return on the market.

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Solution Summary

The solution explains how to use the CAPM equation to market risk premium and the expected return on the market.

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If we are given two beta and the expected returns, both these points must lie on the Security Market Line (SML). Since the SML is a straight line we can plot the SML and the market return is the point with the beta =1. The slope of SML is the market risk premium.
From the given data, we find that for the ...

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