Question

Assume the following information about the market and​JumpMasters' stock.​ JumpMasters' beta​ = 1.50, the​ risk-free rate is​ 3.50%. Te market risk​ premium, i.e. the market return in excess of the risk free rate is​ 10%. Using the Securities Market Line​ (SML) in the context of the​ CAPM, what is the Expected Return for​ JumpMasters' stock?A. ​13.50%B. ​27%C. ​7.50%D. ​18.50%

Answer 1

D. ​18.50%

Step-by-step explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 3.50% + 1.5 × (13.50% - 3.50%)

= 3.50% + 1.5 × 10%

= 3.50% + 15%

= 18.50%

The (Market rate of return - Risk-free rate of return) is also known as market risk premium. Since the market risk premium is given i.e 10% so the market rate of return would be 13.50%