Security A has an expected rate of return of 29.8 percent and a beta o

Security A has an expected rate of return of 29.8 percent and a beta of 3.1. Security B has a beta of 1.70. If the
Treasury bill rate is 5 percent, what is the expected rate of return for Security B?

What will be an ideal response?

ANSWER

Use A to determine the market risk premium.
.298 = .05 + 3.1(market return – .05)
.248 = (3.1 × market return) – .155
.403/3.1 = .13 = market return
Return on B = .05 + 1.7(.13 – .