Assume that the market is in equilibrium and that stock betas can be estimated with historical data. The returns on the market, the returns on United Fund (UF), the risk-free rate, and the required return on the United Fund are shown below. Based on this information, what is the required return on the market, rM?
$\begin{array} { l r }
\underline { \text { Year } } & \underline {\text { Market }} &\underline { U F } \
2011& - 9 \% &- 14 \%\
2012& 11 \% &16 \%\
2013 & 15 \%&22 \% \
2014 & 5 \% &7 \%\
2015 & - 1 \% &- 2 \%
\end{array}$

$\mathrm { rgF: } : 7 \mathrm { cde } \%$
rUrited $15.00 \%$
A) 10.57%
B) 11.13%
C) 11.72%
D) 12.33%
E) 12.95%

Question

Assume that the market is in equilibrium and that stock betas can be estimated with historical data. The returns on the market, the returns on United Fund (UF), the risk-free rate, and the required return on the United Fund are shown below. Based on this information, what is the required return on the market, rM?
$\begin{array} { l r } 
\underline { \text { Year } } & \underline {\text { Market }} &\underline { U F } \ 
2011& - 9 \% &- 14 \%\
2012& 11 \% &16 \%\ 
2013 & 15 \%&22 \% \ 
2014 & 5 \% &7 \%\ 
2015 & - 1 \% &- 2 \%
\end{array}$

$\mathrm { rgF: } : 7 \mathrm { cde } \%$
rUrited $15.00 \%$
A) 10.57%
B) 11.13%
C) 11.72%
D) 12.33%
E) 12.95%

Quizplus · Accepted Answer

The following graph shows that United's returns are perfectly correlated with the market.
 TRF: $7.001$
runited: $15.00 \%$ 
 1. Find beta: We found beta using Excel, but it could be found with a calculator or using the rise-over-minethod as shown below:
$$\frac { \text { Rise } } { \text { Run } } = \frac { 22 - 16 } { 15 - 11 } = \frac { 6 } { 4 } = \mathrm { b } = 1.5$$
2. Now find RPM
$\begin{array} { l } 
I _ { 5 } = 15 \% / 1 = 79 + 1.5 ( \mathrm { RP } ) \
\mathrm { RP } _ { \mathrm { M } } = ( 15 - 7 ) / 1.5 = 5.33 \%
\end{array}$
3. Find $r _ { M } : r _ { M } = r _ { R F } + R P _ { M } = 12.33 \%$

Assume That the Market Is in Equilibrium and That Stock