Final answer:
To find the expected rate of return on the market, the CAPM formula is rearranged to account for the known variables. With an expected return of 16.48%, a beta of 1.33, and a risk-free rate of 3.65%, the calculation reveals that the expected market return is 13.30%.
Step-by-step explanation:
The expected rate of return on the market can be estimated using the Capital Asset Pricing Model (CAPM), which is expressed by the formula:
Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
We can rearrange this formula to solve for the Market Return given the other values:
Market Return = (Expected Return - Risk-Free Rate) / Beta + Risk-Free Rate
Using the information provided: Expected Return on stock = 16.48%, Beta = 1.33, and Risk-Free Rate (U.S. Treasury bill yield) = 3.65%.
Thus, the expected Market Return is:
Market Return = (16.48% - 3.65%) / 1.33 + 3.65%
Market Return = (12.83%) / 1.33 + 3.65%
Market Return = 9.65% + 3.65%
Market Return = 13.30%
This percentage incorporates the inflation rate and represents the overall return expected by market participants, beyond the risk-free rate adjusted for the risk premium of the market.