Posted by **Bob** on Tuesday, April 20, 2010 at 6:20pm.

Suppose you are considering two investments, stock A and stock B. The beta of A is 1.20, and the beta of B is 0.80. Stock A has an expected return of 12% and Treasury Bills are yielding 3%.

If the two stocks are fairly prices, what's the expected return on the Market Index?

Someone said the answer was:

(.12-.03)/1.2)+.03 = .105

Can someone please explain why??

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