Question

Suppose a firm has a beta of 1.25, the risk-free yield on long-term government securities is 4.0%, and the market-risk premium is 6.0%. the expected return under the capm is

a. 11.5%.
b. 7.5%.
c. 4.0%.
d. 6.0%.

Answer 1

Using the Capital Asset Pricing Model (CAPM), the expected return for a firm with a beta of 1.25, a risk-free rate of 4.0%, and a market-risk premium of 6.0% is calculated to be 11.5%, which is option a.

Step-by-step explanation:

The question concerns a calculation of expected return using the Capital Asset Pricing Model (CAPM). According to the CAPM formula, expected return is calculated as:

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

Given the parameters:

• Risk-Free Rate = 4.0%
• Beta = 1.25
• Market Risk Premium = 6.0%

Plugging the numbers into the formula:

Expected Return = 4.0% + 1.25 * (6.0%)

Expected Return = 4.0% + 7.5%

Expected Return = 11.5%