Answer:
10.5%
Explanation:
In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below
Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)
For one stock
8% = Risk-free rate of return + 0.5 × (Market rate of return - Risk-free rate of return)
8% = Risk-free rate of return + 0.5 × Market rate of return - 0.5 × Risk-free rate of return
8% = 0.5 × Risk-free rate of return + 0.5 × Market rate of return
8% ÷ 0.5 = Risk-free rate of return + Market rate of return
So, Risk-free rate of return + Market rate of return = 16
Risk-free rate of return = 16 - Market rate of return - 1
For another stock
13% = Risk-free rate of return + 1.5 × (Market rate of return - Risk-free rate of return)
13% = Risk-free rate of return + 1.5 × Market rate of return - 1.5 × Risk-free rate of return
13% = - 0.5 × Risk-free rate of return + 1.5 × Market rate of return - 2
Now put these equations together
13% = - 0.5 × (16 - Market rate of return) + 1.5 × Market rate of return
13% = - 8 + 0.5 × Market rate of return + 1.5 × Market rate of return
So, Market rate of return would be
= 21 ÷ 2
= 10.5%
