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What is the return on the market and risk-free rate

1. Consider the following two stocks:

	Beta	Expected Return
Murck Pharmaceutical	1.4	25%
Pizer Drug Corp.	0.7	14%

Assume the CAPM holds. Based upon the CAPM, what is the return on the market? What is the risk-free rate?

2. Suppose you observe the following situation:

Return if a State Occurs
State of Economy	Probability	Stock A	Stock B
Bust	.25	-.10	-.30
Normal	.50	.10	.05
Boom	.25	.20	.40

a. Calculate the expected return of each stock.

b. Assuming the CAPM is true and stock A's beta is greater than stock B's beta by .25, what is the risk premium?

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Solution Preview :

Prepared by a verified Expert

Finance Basics: What is the return on the market and risk-free rate

Reference No:- TGS0680101

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Solution Preview :

Prepared by a verified Expert

Finance Basics: What is the return on the market and risk-free rate

Reference No:- TGS0680101

Recent Questions Asked Finance Basics

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