Question

Capital Asset Pricing​ Model) Johnson​ Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 4 ​percent, and the expected return for the market is 10 percent. What should be the expected rate of return for each investment​ (using the​ CAPM)?

Answer 1

Step-by-step explanation:

Using the expected rate of return we have this formula :

Treasury bills are the risk free 4% investment and market rate is 10%

assuming that of the secuirty is 1.2

Beta is the how much return of market premuim we want from security

market premuim = Rm-Rf

CAPM = Rf+(Rm-Rf)*beta

CAPM = 4%+(10-4%)*1.2

CAPM = 11.2%

So the expected rate of return is 11.2% for security A whose beta is 1.2