Question

You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S &P500 is 14%. What rate of retum should you expect for your investment in Citizens Bank?

a)11.15%
b)15.39%
c)16.75%
d)2075%

Answer 1

Using the Capital Asset Pricing Model (CAPM), the expected rate of return for an investment in Citizens Bank Corp is calculated to be 20.75%, corresponding to answer choice d).

Step-by-step explanation:

Expected Rate of Return Calculation

The student's question involves calculating the expected rate of return for an investment in Citizens Bank Corp using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

Given values are:

Risk-Free Rate (U.S. Treasury bills yield): 2.75%

Beta for Citizens Bank Corp: 1.6

Expected Market Return (S&P500): 14%

Plugging these values into the CAPM formula we get:

Expected Return = 2.75% + 1.6 * (14% - 2.75%)

Expected Return = 2.75% + 1.6 * 11.25%

Expected Return = 2.75% + 18%

Expected Return = 20.75%

Therefore, the correct answer is d) 20.75%.