Question

Suppose the risk-free return is 4%, and you measure the expected return on the market to be 10%. best buy has a beta of 1.5. according to the capm, what is its expected return?

a. 13%
b. 16%
c. 19%
d. 21%

Answer 1

Utilizing the CAPM formula, the expected return for Best Buy is calculated to be 13%, making option A the correct answer.

Step-by-step explanation:

The Capital Asset Pricing Model (CAPM) is used to determine the expected return of an investment based on the risk-free return, the expected market return, and the investment's beta. According to CAPM, the formula to calculate the expected return is:

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

In this scenario, the risk-free return is 4%, the expected return on the market is 10%, and Best Buy's beta is 1.5.

Using the formula: Expected Return = 4% + 1.5 * (10% - 4%)

Expected Return = 4% + 1.5 * 6%

Expected Return = 4% + 9%

Expected Return = 13%

Therefore, the expected return for Best Buy according to the CAPM is 13%, which corresponds to option A.