Question

In: Finance

Capital Asset Pricing Model

If the risk-free rate in the market is 4% and the expected return from the market is 10%. What will be the expected return from your stock if it has a beta of 1.2?

Solutions

Expert Solution

The expected return of stock will be calculated using the CAPM model

Risk free rate = 4%

Expected market return = 10%

Beta of the stock = 1.2

The terms used in the formula

Rf - RIsk-free rate 

Rm - Market return

ER - Expected Return of the stock

\( \begin{align}ER &= Rf + \beta (Rm - Rf)\\ &= 4\% + 1.2(10\% - 4\%)\\ &= 4\% + 7.2\%\\ &= 11.2\% \end{align} \)


The expected return of the stock is 11.2%

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