Question

If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:

A. return on the stock minus the risk-free rate.
B. difference between the return on the market and the risk-free rate.
C. beta times the market risk premium.
D. beta times the risk-free rate.
E. market rate of return.

Answer 1

B. difference between the return on the market and the risk-free rate

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)

where,

(Market rate of return - Risk-free rate of return) = Market risk premium

And all things remain constant.