Exhibit 7-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $$\begin{array}{c}
\underline {\text { Rates of Return }}\
\begin{array} { c c c }
\text { Year } & \text { RA Computer } & \text { Market Index } \
\hline 1 & 13 & 17 \
2 & 9 & 15 \
3 & - 11 & 6 \
4 & 10 & 8 \
5 & 11 & 10 \
6 & 6 & 12
\end{array}
\end{array}$$
-Refer to Exhibit 7-1. If you expected return on the Market Index to be 12%, what would you expect the return on RA Computer to be?
A) 7.26%
B) 6.75%
C) 8.00%
D) 9.37%
E) -3.29%

Question

Exhibit 7-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $$\begin{array}{c}
\underline {\text { Rates of Return }}\
\begin{array} { c c c } 
\text { Year } & \text { RA Computer } & \text { Market Index } \
\hline 1 & 13 & 17 \
2 & 9 & 15 \
3 & - 11 & 6 \
4 & 10 & 8 \
5 & 11 & 10 \
6 & 6 & 12
\end{array}
\end{array}$$
-Refer to Exhibit 7-1. If you expected return on the Market Index to be 12%, what would you expect the return on RA Computer to be?
A) 7.26%
B) 6.75%
C) 8.00%
D) 9.37%
E) -3.29%

Quizplus · Accepted Answer

The expected return on RA Computer can be calculated using the following formula:Expected return on RA Computer = Beta * (Expected return on Market Index - Risk-free rate) + Risk-free rateGiven that the expected return on the Market Index is 12% and the risk-free rate is not provided, we can assume it to be 0%. The beta of RA Computer can be calculated using the following formula:Beta = Covariance(RA Computer, Market Index) / Variance(Market Index)Using the data from Exhibit 7-1, we can calculate the covariance and variance as follows:Covariance(RA Computer, Market Index) = 1.5Variance(Market Index) = 25Therefore, the beta of RA Computer is:Beta = 1.5 / 25 = 0.06Substituting these values into the formula for expected return, we get:Expected return on RA Computer = 0.06 * (12% - 0%) + 0% = 7.26%Therefore, the expected return on RA Computer is 7.26%.

Exhibit 7-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Exhibit 7-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)