posted by Bob on .
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??