Can someone please explain exacty how the expected return was calculated? From Qi(a) we find the beta, which for me is 2(0.5)(0.7)/(0.7)^2 = 2(0.5)/0.7 Then E_i = 0.06 + B_i (12) Seems i am missing out on something. why is there (12-6) and not 12? Isn't the expected market return 12%?
Check the formula Please refer to page 7 of Chapter 7, (1.5 The capital market line). The equation given there is: Ep - r = (Em - r )*SD(p)/SD(m) => Ep = r + (Em - r )*SD(p)/SD(m) SD= Standard deviation. Hope it helps.
