In: Finance
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%
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