Final answer:
To calculate the expected return on the market, the CAPM is used with the given expected stock return of 14%, stock beta of 1.60, and risk-free rate of 4.8%. Solving the CAPM formula reveals that the expected return on the market must be 10.55 percent.
Step-by-step explanation:
The question concerns the calculation of the expected return on the market using the Capital Asset Pricing Model (CAPM). According to the CAPM formula, the expected return on a stock is equal to the risk-free rate plus the product of the stock's beta and the market risk premium (the expected return on the market minus the risk-free rate).
Given that the expected return on the stock is 14 percent, its beta is 1.60, and the risk-free rate is 4.8 percent, we can set up the equation:
14% = 4.8% + 1.60(Market Return - 4.8%)
To find the expected market return, we solve for Market Return:
14% - 4.8% = 1.60(Market Return - 4.8%)
9.2% = 1.60(Market Return - 4.8%)
Market Return - 4.8% = 9.2% / 1.60
Market Return - 4.8% = 5.75%
Market Return = 5.75% + 4.8%
Market Return = 10.55%
Therefore, the expected return on the market must be 10.55 percent.