Question

Consider a stock with a beta of 1.9. Suppose the expected market return is 8% and the risk-free rate is 1%. What is this stock's expected return according to the CAPM? Answer in percent, rounded to one decimal place

Answer 1

The expected return of a stock according to the CAPM can be calculated using the formula: Expected Return = Risk-Free Rate + (Beta x (Expected Market Return - Risk-Free Rate)). Plugging in the given values, the expected return is 14.3%.

Step-by-step explanation:

The CAPM (Capital Asset Pricing Model) is used to calculate the expected return of a stock based on its beta, the risk-free rate, and the expected market return. According to the CAPM formula, the expected return of a stock can be calculated using the following equation:

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

In this case, the beta of the stock is given as 1.9, the expected market return is 8%, and the risk-free rate is 1%. Plugging these values into the formula, we can calculate the expected return of the stock:

Expected Return = 1% + (1.9 x (8% - 1%))

Expected Return = 1% + (1.9 x 7%)

Expected Return = 1% + 13.3%

Expected Return = 14.3%