White Company stock has a beta of 2 and a required return of 23%,while Black Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company.The risk-free rate of return according to the CAPM is
A) 4%.
B) 5%.
C) 6%.
D) impossible to determine with the information given.

Question

Quizplus · Accepted Answer

The CAPM formula is: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Black Company, 14% = Risk-Free Rate + 1 * (Market Return - Risk-Free Rate). For White Company, 23% = Risk-Free Rate + 2 * (Market Return - Risk-Free Rate). Solving these equations simultaneously gives a Risk-Free Rate of 5%.

White Company Stock Has a Beta of 2 and a Required