Both questions are linked

1.Castle Black Camping is twice as risky as the average stock. The market should earn 11% and the risk free rate is 2%. What is a fair return for CBC?

Answer:(20%)

R=rf + b * (rm-rf) = rf + b * (RPm).

= .02+ 2*(.11-.02) = .2 = 20% Where did this 2 come from reading the question?

2.Harlan County Safety Co. has a beta of 1.2. Form a portfolio that is half HCSC and half CBC (from number 9). What is a fair return?

Answer: (16.4%)

Step1..5*1.2+.5*2=1.6 What is going on here exactly? Why were the two betas halved and added together?

Step2..02+1.6*.09=.164 How did we assume rf is 2% here? Why did we use the same rf and rm as the previous question?