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Stock of Z has a beta of 1
Stock of Z has a beta of 1.50 and a return of 25.5% Stock A has a return of 11.0%. The risk-free rate is 3.5%. These two stocks are correctly priced relative to each other, in equilibrium What is the beta of A? 17 (Do not round intermediate calculations and enter your answer as a number rounded to 2 decimal places, e.g., 1.23.) beta of A
Expert Solution
Expected return of Z using CAPM model =Risk Free Rate+Beta *(Market return -risk Free Rate)
25.5%=3.5%+1.50*(Market return -3.5%)
Market return =((25.5%-3.5%)/1.50+3.5% =18.1667%
Expected return of A =Risk Free Rate + Beta of A *(Market return -risk Free Rate)
11%=3.5%+Beta *(18.1667% -3.5%)
Beta of A=(11%-3.5%)/(18.1667%-3.5%) =0.51
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