what would be the rate of return on a security with standard deviation of 5% if the risk free rate of interest is 4% and the price of total risk is 0.5?
To calculate the rate of return on a security, we need to use the Capital Asset Pricing Model (CAPM). The CAPM is a model that calculates the expected return on an investment by considering the risk-free rate of interest, the security's beta, and the price of total risk.
The formula for calculating the expected return using the CAPM is:
Expected return = Risk-free rate + Beta * (Price of total risk)
Given the following information:
- Risk-free rate of interest (RF) = 4%
- Standard deviation (σ) = 5%
- Price of total risk (λ) = 0.5
We need to find the beta (β) to substitute it into the formula. Unfortunately, the beta is not provided in your question. The beta measures the sensitivity of a security's returns to the overall market returns. It is usually obtained from financial data sources or through regression analysis.
Once you have the beta, you can calculate the expected rate of return using the CAPM formula.
Please note that without the beta value, we cannot provide a specific rate of return in this case.