Question

The market risk premium is 10.0 percent, and the risk-free rate is 4.2 percent. If the expected return on a bond is 10.5 percent, what is its beta? (Round answer to 2 decimal places, es. 15.25.) Beta of the bond

Answer 1

Answer:Beta of the bond = 0.63

Explanation:

According to the CAPM, Capital Asset pricing mode formulae, The expected return is given as

Expected return= Risk free rate + Beta ( Market premium)

where

Expected return = 10.5 percent

Market risk premium =10.0 percent

risk-free rate is 4.2 percent.

Expected return= Risk free rate + Beta ( Market premium)

Putting their values and solving, we have

10.5% = 4.2%+ Beta (10.0%)

10.5 %- 4.2%=Beta (10.0%)

Beta=10.5 %- 4.2%/10.0%

Beta=0.63.

Beta of the bond = 0.63