If a stock has a beta of 0

Management May 27, 2021

If a stock has a beta of 0.8 and a required rate of return of 9.0 percent, what is the return on the market portfolio (rM) when the risk-free rate (rRF) is 1.9 percent and the market is in equilibrium? Show your answer to the nearest .1% using whole numbers (e.g., enter 14.1% as 14.1 rather than .141).

Expert Solution

Computation of Return on the Market Portfolio (rM):

Required Rate of Return = Risk-free Rate + Beta*(Market Return - Risk-free Rate)

9% = 1.9% + 0.8*(x - 1.9%)

9% = 1.9% + 0.8x - 0.0152

9% + 0.0152 - 1.9% = 0.8x

8.6% = 0.8x

x = 8.6% / 0.8

x = 0.10775 or 10.775% or 10.8%

So, Return on the Market Portfolio (rM) is 10.8%.

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