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 calculate the slope between securities A and B using the Capital Asset Pricing Model (CAPM), we need to use the formula:
Slope = (Return of A - Risk-Free Rate) / (Return of B - Risk-Free Rate)
Let's assume the risk-free rate is 5%.
For securities A and B:
Return of A = 10%
Return of B = 14%
Risk-Free Rate = 5%
Slope between A and B = (10% - 5%) / (14% - 5%)
= 5% / 9%
= 0.5556
Therefore, the correct slope between securities A and B according to CAPM is 0.5556.
Now, let's calculate the slope between securities A and C using the same formula.
For securities A and C:
Return of A = 10%
Return of C = 20%
Risk-Free Rate = 5%
Slope between A and C = (10% - 5%) / (20% - 5%)
= 5% / 15%
= 0.3333
Therefore, the correct slope between securities A and C according to CAPM is 0.3333.