How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask SteveS Your Own Question

SteveS, MBA
Category: Homework
Satisfied Customers: 453
Experience:  MBA from Top 5 US Business School, Tutoring Experience for Over Two Years
Type Your Homework Question Here...
SteveS is online now
A new question is answered every 9 seconds

(Beta and required return) The riskless return is currently

Customer Question

(Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated
the contingent returns given here.
a. Calculate the expected returns on the stock market and on Chicago Gear stock.
b. What is Chicago Gear’s beta?
c. What is Chicago Gear’s required return according to the CAPM?
Realized Return
State of the Market Probability that State Occurs Stock Market Chicago Gear
Stagnant .20 10% 15%
Slow growth .35 10 15
Average growth .30 15 25
Rapid growth .15 25 35
Submitted: 7 years ago.
Category: Homework
Expert:  SteveS replied 7 years ago.

You need to spend $3 to view this post. Add Funds to your account and buy credits.
SteveS and 3 other Homework Specialists are ready to help you
Customer: replied 7 years ago.

Can you explain the formula?


rM - E(rM) What does the E represent?

Expert:  SteveS replied 7 years ago.

I'd be happy to expalin whatever you are unclear on. I wasn't sure if you need more explanation than rM - E(rM). Just let me know.

To get the covariance between the stock market and Chicago Gear, you need to multiply each probability by (rM - E(rM)) and (rCG - E(rCG)). There are going to be four of these, representing each state of the market. The covariance is the sum of these four terms.

rM is the stock market return in each state of the market. For example, rM = -10% in the stagnant state.
E(rM) is the expected return of the market. This is the weighted average of the stock market returns in the four states. 20%*-10%+35%*10%+30%*15%+15%*25% = 9.8%

Related Homework Questions