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UUTUN U N HILJU IGSUIS. 8 Expected return and systematic risk [LO 7] The expected return...

Question:

UUTUN U N HILJU IGSUIS. 8 Expected return and systematic risk [LO 7] The expected return on the ith asset is given by: ER ) =
UUTUN U N HILJU IGSUIS. 8 Expected return and systematic risk [LO 7] The expected return on the ith asset is given by: ER ) = Rp + B; (ETRM) - Rel al What is the expected return on the ith asset where R-0.08, B - 1.25 and ERM-0.142 b) What is the expected return on the market portfolio where E(R) - 0.11, R = 0.08 and B: = 0.75? c) What is the systematic risk of the ith asset where E(R) - 0.14, R = 0.10 and ERM = 0.15?

Answers

a). E(Ri) = Rf + [\betai * {E(RM) - Rf]

= 0.08 + [1.25 * (0.14 - 0.08)] = 0.08 + [1.25 * 0.06] = 0.08 + 0.075 = 0.155, or 15.5%

b). E(Ri) = Rf + [\betai * {E(RM) - Rf]

0.11 = 0.08 + [0.75 * {E(RM) - 0.08}]

0.11 - 0.08 = [0.75 * {E(RM) - 0.08}]

0.03 / 0.75 = E(RM) - 0.08

0.04 = E(RM) - 0.08

E(RM) = 0.04 + 0.08 = 0.12, or 12%

c). E(Ri) = Rf + [\betai * {E(RM) - Rf]

0.14 = 0.10 + [\betai * {0.15 - 0.10}]

0.14 - 0.10 = [\betai * 0.05]

\betai = 0.04 / 0.05 = 0.8

.

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