Question

Suppose a mutual fund yielded a return of 14% last year. The risk-free rate was 5% last year and the stock market return was 10% last year. Its CAPM alpha (α) is 0. What is beta (β) for the mutual fund in the CAPM?

Answer 1

Answer:

Beta is 1.8

Explanation:

CAPM or capital asset pricing model is used to compute expected return on stock by establishing relationship between expected returns and systematic risk (also called beta).

Given:

Return on mutual fund = 14%

Risk free rate (Rf) = 5%

Market return (Rm) = 10%

Risk premium = Rm - Rf

                      = 10% - 5%

                      = 5%

CAPM formula:

Returns = Rf + β(Rp)

14% = 5% + β(5%)

β = 9 / 5

β = 1.8

Beta of mutual fund is 1.8