FIN300 Managerial Finance
Professor H. Wang
Solutions to Problem Set #6
1
According to the Capital Asset Pricing Model:
E(r)
= r
f
+
β
(EMRP)
where
E(r)
= the expected return on the stock
r
f
= the risk-free rate
β
=
the stock’s beta
EMRP
= the expected market risk premium
In this problem:
r
f
= 0.06
β
=
1.2
EMRP
= 0.085
The expected return on Holup’s stock is:
E(r)
= r
f
+
β
(EMRP)
= 0.06 + 1.2(0.085)
=
0.162
The expected return on Holup’s stock is 16.2%.
2
According to the Capital Asset Pricing Model:
E(r)
= r
f
+
β
(EMRP)
where
E(r)
= the expected return on the stock
r
f
= the risk-free rate
β
=
the stock’s beta
EMRP
= the expected market risk premium

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