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A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9 percent. What must the expected return on the market be
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A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9 percent. What must the expected return on the market be

User Karthik Gorijavolu
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1 Answer

21 votes
21 votes

Answer:

11.26%

Step-by-step explanation:

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

rm = expected return on the market

11.85 = 3.9 + 1.08(rm - 3.9)

11.85 - 3.9 = 1.08(rm - 3.9)

7.95 = 1.08(rm - 3.9)

7.95 / 1.08 = rm - 3.9

7.361 = rm - 3.9

rm = 11.26

User Peter Wateber
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