Question
The risk free rate is 3% and you have two risky assets, A and B. The expected return of the risky assets A is 10%.
The risk free rate is 3% and you have two risky assets, A and B. The expected return of the risky assets A is 10%. The expected return of B is 13%. Asset B is 25% more risky than asset A (as measured by the common factor).
Note that the two assets are not correctly priced according to CAPM. (a) What should be the risk free rate so that the two assets are correctly priced? (b) What should the difference in risk between the two assets be so that the assets are correctly priced?
Please show your calculation process and explain the answer in details.
There is NO information missing in the question.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started