Question

Here are data on two companies. the t-bill rate is 5.4% and the market risk premium is 6.8%. company$1 discount storeeverything $5 forecast return13 % standard deviation of returns15 % beta1.61.0 required: what would be the expected rate of return for each company, according to the capital asset pricing model (capm).

Answer 1

According to the Capital Asset Pricing Model (CAPM), the expected rate of return for Company 1 is 16.28% and for the $5 Discount Store is 12.2%, given their betas of 1.6 and 1.0, respectively.

Step-by-step explanation:

The student is asking about the expected rate of return for two companies using the Capital Asset Pricing Model (CAPM). The CAPM formula is used for calculating the expected return of an asset based on its risk in comparison to the market as a whole. The formula is given by:

Expected Return = Risk-Free Rate + Beta x (Market Risk Premium)

For Company 1, with a beta of 1.6, the calculation is as follows:

Expected Return = 5.4% + 1.6 x (6.8%) = 5.4% + 10.88% = 16.28%

For the $5 Discount Store, with a beta of 1.0, the expected return is:

Expected Return = 5.4% + 1.0 x (6.8%) = 5.4% + 6.8% = 12.2%

These calculations show the expected rate of return according to CAPM for each company given their individual level of systematic risk, as indicated by their betas.