Question

the risk-free rate is 2.80%, and the expected market return is 4.00%. if the expected return on security x is 7.50%, what is the beta of the security? (round final answer to two decimal places.)

Answer 1

The beta of security X, using the CAPM formula and given expected market return and risk-free rate, is calculated to be 3.92 after rounding to two decimal places. The beta of the security is 3.92.

Step-by-step explanation:

To find the beta of security X, we use the Capital Asset Pricing Model (CAPM) formula, which states that the expected return on a security is equal to the risk-free rate plus the product of the security's beta and the market risk premium (the expected market return minus the risk-free rate).

The expected market return is given as 4.00%, and the risk-free rate is 2.80%. The expected return on security X is 7.50%. So, we can set up the equation as follows:

7.50% = 2.80% + Beta * (4.00% - 2.80%)

Solving for Beta gives us:

Beta = (7.50% - 2.80%) / (4.00% - 2.80%)

Beta = 4.70% / 1.20%

Beta = 3.92 (rounded to two decimal places).