Can someone help explain how the answer is NOT C? =Rf + Beta (E®mkt - Rf) .05 + -.5 (.08-.05) = .035…3.5% What am doing wrong? The beta of stock D is -0.5. If the expected return of Stock D is 8%, and the risk-free rate of return is 5%, what is the expected return of the market? A) -1.0%. B) +3.0%. C) +3.5%.
Just take the CAPM formula, plug in the values and solve for the market return Rm: (Watch out for the right signs - ß is negative here)
ER D = Rf + ß * (Rm - Rf)
8 = 5 - 0.5 * (Rm - 5) 8 = 5 - 0.5Rm + 2.5 8 = 7.5 - 0.5 Rm 0.5 = - 0.5 Rm Rm = -1
Answer A should be correct. Best, Oscar
Yes, your right…I stupidly didn’t read the question carefully and realized it right after i posted it. I plugged in 8% as the E(rmkt) instead of realizing it was the return of stock D. That was ridirkulous of me. Thanks Oscar.