The average stock market return in 20-ieth century has been 9%. Consider a security whose average return has been 7%, and whose beta is estimated at 0.5.
If last year.s average market return was 7%, what would you expect the return on the security to be? Explain. If you think there is not enough information to answer the question, explain why.
The average market return = 9%
The average return on security = 7%
Beta of security=0.5
According to CAPM model
Return on a security (r) = Risk free return(rf) + Market risk premium (rpm) *Beta
For market the equation is
9% = rf + ...
Using CAPM, various inquiries are solved.