Securities A,B,C have the following;
Sec. Exp.Ret. Beta
A 10 .7
B 14 1.2
C 20 1.8
According to CAPM, what is the correct slope between security A&B?
A&C?
To determine the correct slope between securities A and B, as well as between securities A and C according to the Capital Asset Pricing Model (CAPM), we need to calculate the differences in their expected returns and betas. Here are the steps:
1. Calculate the difference in expected returns between securities A and B:
Slope_A_B = (Exp.Ret_B - Exp.Ret_A) / (Beta_B - Beta_A)
Slope_A_B = (14 - 10) / (1.2 - 0.7)
Slope_A_B = 4 / 0.5
Slope_A_B = 8
2. Calculate the difference in expected returns between securities A and C:
Slope_A_C = (Exp.Ret_C - Exp.Ret_A) / (Beta_C - Beta_A)
Slope_A_C = (20 - 10) / (1.8 - 0.7)
Slope_A_C = 10 / 1.1
Slope_A_C ≈ 9.09
Therefore, the correct slope between security A and B is 8, and the correct slope between security A and C is approximately 9.09.