Question

A stock has a beta of 1.28, the expected return on the market is 12%, and the risk-free rate is 4.5%. Using the CAPM, what is the expected return on this stock

Answer 1

14.10%

Explanation:

The calculation of expected return on this stock is shown below:-

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 4.5% + 1.28 × (12% - 4.5%)

= 4.5% + 1.28 × 7.5%

= 4.5% + 9.6%

= 14.10%

The Market rate of return - Risk-free rate of return) is also called as the market risk premium

hence, the expected rate of return is 14.10%