The expected rate of return is 1.5 times the 12% expected rate of return on the market. What is the beta if the risk-free rate is 4%? Question 44Answera.1.75b.0.875c.1.17
Question
The expected rate of return is 1.5 times the 12% expected rate of return on the market. What is the beta if the risk-free rate is 4%? Question 44Answera.1.75b.0.875c.1.17
Solution
The beta of an investment is a measure of its systematic risk, or the sensitivity of its returns to changes in the overall market. It can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula:
Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
Given in the problem, we have:
Expected Return = 1.5 * Market Return = 1.5 * 12% = 18% Risk-Free Rate = 4% Market Return = 12%
We can plug these values into the CAPM formula and solve for Beta:
18% = 4% + Beta * (12% - 4%)
Solving for Beta gives:
Beta = (18% - 4%) / (12% - 4%) = 14% / 8% = 1.75
So, the beta of the investment is 1.75 (Answer a).
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