 Business
20 May, 10:53

# General pharmacy's stock has a beta of 1.8 and an expected return of 14%, and sicoras corp.'s stock has a beta of 1.5 and an expected return of 16.2%. assuming capital-asset pricing model holds, calculate the return on the market portfolio.?

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1. 20 May, 12:52
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Given:

General pharmacy’s stock has a beta of 1.8 and an expected return of 14%,

Sicoras corp.’s stock has a beta of 1.5 and an expected return of 16.2%.

Let Rf stand for risk free rate.

Let Rm stand for expected market return.

General Pharmacy: 14% = Rf + 1.8 (Rm-Rf)

Sicoras Corp.: 16.2% = Rf + 1.5 (Rm-Rf)

0.14 = Rf + 1.8Rm - 1.8Rf

0.14 = Rf - 1.8Rf + 1.8Rm

0.14 = - 0.8Rf + 1.8Rm

0.14 + 0.8Rf = 1.8Rm

Rm = 0.14/1.8 + 0.8Rf/1.8

Rm = 0.078 + 0.444Rf

0.162 = Rf + 1.5 (Rm-Rf)

0.162 = Rf + 1.5[ (0.078+0.444Rf) - Rf]

0.162 = Rf + 0.117 + 0.666Rf - 1.5Rf

0.162 - 0.117 = Rf + 0.666Rf - 1.5Rf

0.045 = 0.166Rf

0.045/0.166 = Rf

0.271 = Rf

Rm = 0.078 + 0.444Rf

Rm = 0.078 + 0.444 (0.271)

Rm = 0.078 + 0.120

Rm = 0.198

Rf = 27.1%; Rm = 19.8%

The risk free rate is 27.1% and the expected market return is 19.8%.

To check, simply substitute the value of Rf and Rm in the above equation.