Security A has an expected rate of return of 22% and a beta of 2.5. Security B has a beta of 1.20. If the Treasury bill rate is 2.0%, what is the expected rate of return for security B?
What will be an ideal response?
Answer:
RA = RF + BA(Rm - Rf)
.22 = .02 + 2.5 (Rm - .02)
.20 = 2.5 (Rm - .02) = 2.5 Rm - .05
.25 = 2.5 Rm
.10 = Rm
RB = Rf + BB(Rm - Rf)
RB = .02 + 1.20(.10 - .02)
RB = .116 or 11.6%
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