We do bankruptcies is a law firm that specializes in providing advice to firms in financial distress. it prospers in recessions when other firms are struggling. consequently, its beta is negative, −0.2. a. if the interest rate on treasury bills is 6% and the expected return on the market portfolio is 16%, what is the expected return on the shares of the law firm according to the capm?

4%

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)

= 6% - 0.2 × (16% - 6%)

= 6% - 0.2 × 10%

= 6% - 2%

= 4%

The (Market rate of return - Risk-free rate of return)  is also known as market risk premium

answer; is usually (less than) the socially optimal level of consumption;

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