Question

"Cullumber, Inc., stock has a beta of 1.30. If the expected market return is 15.0 percent and the risk-free rate is 4.0 percent, what does CAPM indicate the appropriate expected return for Cullumber stock is? (Round answer to 2 decimal places, e.g. 52.75.)"

Answer 1

14.4%

Step-by-step explanation:

Using CAPM,

The Expected return = Risk free rate + Market return - Risk free rate * Beta

The Expected return = 4.0 % + 15%-4.0%*1.30

The Expected return = 4.0 % + 9.0%*1.30

The Expected return = 0.04+ (0.08*1.30)

The Expected return = 0.04 + 0.104

The Expected return = 0.144

The Expected return = 14.4%