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CAPM Model - Calculating Expected & Risk Free Return

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A) Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 10%, the Risk-Free Rate is 3%, and the Beta for Asset "i" is 1.5.

B) Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 14%, the Expected Return on the Market Portfolio is 12%, and the Beta for Asset "j" is 1.5.

Also, how do you figure out risk free rate?

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Solution Summary

Solution explains the steps in determining expected rate and risk free return using CAPM model.

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Solution 1:

Ke=Krf+Beta*(Km-Krf)
ke is expected rate of return =10%
krf is return on risk free asset = 3%
Km is expected market return = ?
Beta = 1.5
Put these values in equation and get
0.1 = ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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