Question

Consider the CAPM. The risk-free rate is 7%, and the expected return on the market is 13%. What is the expected return on a stock with a beta of 1.5?

Answer 1

r = 0.16 or 16%

Step-by-step explanation:

Using the CAPM, we can calculate the required rate of return on a stock. This is the minimum return required by the investors to invest in a stock based on its systematic risk, the market's risk premium and the risk free rate.

The formula for required rate of return under CAPM is,

r = rRF + Beta * (rM - rRF)

Where,

rRF is the risk free rate

rM is the return on market

r = 0.07 + 1.5 * (0.13 - 0.07)

r = 0.16 or 16%