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 find the correct slope between two securities according to the Capital Asset Pricing Model (CAPM), you need to calculate the difference in their expected returns and divide it by the difference in their betas.
For the slope between securities A and B, you would subtract the expected return of security A from the expected return of security B, and divide it by the difference in their betas.
Slope between A and B = (Expected return of B - Expected return of A) / (Beta of B - Beta of A)
= (14 - 10) / (1.2 - 0.7)
= 4 / 0.5
= 8
Therefore, the slope between securities A and B according to the CAPM is 8.
Similarly, to find the slope between securities A and C, you would subtract the expected return of security A from the expected return of security C, and divide it by the difference in their betas.
Slope between A and C = (Expected return of C - Expected return of A) / (Beta of C - Beta of A)
= (20 - 10) / (1.8 - 0.7)
= 10 / 1.1
= 9.09
Therefore, the slope between securities A and C according to the CAPM is 9.09.