By NEAS - 11/20/2022 3:13:54 PM
Corpfin mod 8 expected returns market risk premium risk-free rate practice exam questions
● The ratio of Stock XYZ’s expected return to Stock ABC’s expected return is 1.39
● Stock XYZ has a CAPM beta of 1.28
● The market risk premium is 2.68 times the annual risk-free rate.
Question 8.1: Stock XYZ’s expected return
Interest rate units are arbitrary, so assume the risk-free rate is one unit.
What is Stock XYZ’s expected return?
Answer 8.1: The risk-free rate is one unit, so the market risk premium is 2.68 units.
Stock XYZ’s expected return is 1 + 1.28 × 2.68 = 4.43 units.
Question 8.2: Stock ABC’s expected return
What is Stock ABC’s expected return?
Answer 8.2: The ratio of Stock XYZ’s expected return to Stock ABC’s expected return is 1.39, so
Stock ABC’s expected return is 4.43 / 1.39 = 3.19 units.
Question 8.3: Stock ABC’s CAPM beta
What is Stock ABC’s CAPM beta?
Answer 8.3: The CAPM beta = (the expected return – the risk-free rate) / the market risk premium
= (3.19 – 1) / 2.68 = 0.82.
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