What is the stock's beta?

Stocks of company A have a beta of 0,5 and its expected return is 6%. Stocks of company B have a beta of 1,5 a?

• Stocks of company A have a beta of 0,5 and its expected return is 6%. Stocks of company B have a beta of 1,5 and its expected return is 15%. What is the market expected return and the market risk premium?

• Answer:

  By CAPM: A: 6% = rf + 0.5*(rM - rf) => 6% = 0.5*rf + 0.5*rM B: 15% = rf + 1.5*(rM - rf) => 15% = -0.5*rf + 1.5*rM Adding these two equations togehter we get: 21% = 2*rM => rM = 10.5% (market expected return) Substituting back in 6% = 0.5*rf + 0.5*10.5% => rf = 1.5% market risk premium = 10.5% - 1.5% = 9%