Question

Suppose you are given the following information:

DEF Stock: Expected Return = 10.18%, Beta = 1.06
TUV Stock: Expected Return = 12.69%, Beta = 1.41
Assume that both assets are priced correctly according to CAPM.
Calculate the following:
Risk-free Rate =%
Market Risk Premium =%
Express your answers in percentage terms, rounded to 2 decimal places (ie 10.25)Suppose that you would like to combine the assets into a portfolio with a Beta equal to 1.3What is the expected return of the portfolio?Expected Return of Portfolio = % Express your answer in percentage terms, rounded to 1 decimal place (ie 10.2)

Answer 1

The student's question relates to calculating the risk-free rate and market risk premium using CAPM, and deriving the expected return of a portfolio with a specific beta. Insufficient data prevents the completion of this calculation.

Step-by-step explanation:

The student has asked about calculating the risk-free rate and market risk premium, under the Capital Asset Pricing Model (CAPM), given two stocks with their expected returns and betas. They then wish to know the expected return of a portfolio with a combined beta of 1.3. To find the risk-free rate and the market risk premium, we would normally use the CAPM equation, which is: Expected Return = Risk-free Rate + (Beta * Market Risk Premium) However, since we are not provided with sufficient information to calculate these values and create a portfolio with the specified beta and return, we cannot directly answer this question.