Question

You are holding an Asset that has a beta of 2. Currently, the

risk-free rate is 3%, and the required return on the market is 5%.
What is expected return of the asset that you hold?

Answer 1

The expected return of an asset with a beta of 2, given a risk-free rate of 3% and a market return of 5%, is calculated using the CAPM formula and is 7%.

Step-by-step explanation:

To calculate the expected rate of return for an asset with a known beta, you can use the Capital Asset Pricing Model (CAPM). The formula for CAPM is as follows:

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

Given that the asset's beta is 2, the risk-free rate is 3%, and the required return on the market is 5%, plug these values into the formula:

Expected Return = 3% + 2 * (5% - 3%)

Expected Return = 3% + 2 * 2%

Expected Return = 3% + 4%

Expected Return = 7%

Therefore, the expected return of the asset you hold is 7%.