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    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.

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    Solution Preview

    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% = ...

    Solution Summary

    Using CAPM, various inquiries are solved.