CAPM Beta

[ashleyw]

A stock has a CAPM Beta of one. The risk free rate is R and the market risk premium is 8%. Over the next year, the stock prick will either increase by 20% with a probability of f, or decease 20% with a probability of c. What is R?

A. 6%
B. 7%
C. 8%
D. 9%
E. 10%

It seems to be missing some information, but somehow they get 8%. I looked at the solution, but it makes no sense. Any help is appreciated.

Ashley

[ashleyw]

Nevermind. Apparently this was a typo. f = .875; c = .125; and the market risk premium should be 7%.

[strategygamer]

yeah. i was wondering the same thing. u were using the combination file, i assume? (i was, that's where i got the error from)