Ford Motor Co. has a beta of 2.74. The expected return on the market is 11%,...

Ford Motor Co. has a beta of 2.74. The expected return on the market is 11%, and the risk free rate is 4%. What is the expected return on General Motors stock according to the Capital Asset Pricing Model?

Group of answer choices

a) 34.14%

b) 23.18%

c) 14.74%

d) 9.38%

Expert Solution

SML Ret or CAPM Ret = Rf + Beta ( Rm - Rf )

Rf = Risk free ret
Rm = Market ret
Rm - Rf = Risk Premium
Beta = Systematic Risk

Particulars	Amount
Risk Free Rate	4.000%
Market Return	11.000%
Beta	2.7400
Risk Premium ( Rm - Rf)	7.00%

Systematic risk specifies the How many times security return will deviate to market changes. SML return considers the risk premium for Systematic risk alone.Where as CML return considers risk premium for Total risk. Beta of market is "1".

SML Return = Rf + Beta ( Rm - Rf )
= 4 % + 2.74 ( 7 % )
= 4 % + ( 19.18 % )
= 23.18 %

Rf = Risk Free Rate

jeff jeffy answered 1 year ago

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