Question

According to the CAPM, what is the expected market return given an expected return on a security of 12.5%, a stock beta of 1.9, and a risk-free interest rate of 3%?

Answer 1

Answer:

5%

Explanation:

The security is 12.5%

The stock beta is 1.9

The risk free interest rate is 3%

Therefore the expected market return can be calculated as follows

12.5= 3 + 1.9×Market return

12.5= 3 + 1.9market return

12.5-3= 1.9market return

9.5= 1.9market return

market return= 9.5/1.9

= 5%

Hence the expected market return is 5%