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The risk-free rate is 4%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model:

a. What is the risk premium on the market?

b. what is the required return on an investment with a beta of 1.5?

c. if the expected return on stock X is 11.2%, what is its beta, according to the capital asset pricing model?

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closed as off-topic by Bob Jansen Nov 18 '14 at 11:41

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The CAPM states that $$ E[r-r_f] = \beta E[r_M-r_f], $$ thus $$ E[r] = r_f + \beta E[r_M-r_f], $$ where $r$ is the return of the asset and $r_M$ is the market return, $r_f$ is the risk free rate. Thus you have to substract the risk free rate from the expectations as $E[r-r_f] =E[r]-r_f $. The answers are

  1. $8\%$ as in the other answer
  2. $4\% + 1.5* 8\% = 16\%$
  3. $11.2\%-4\% =\beta*8\%$ thus $\beta=0.9$.
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