Question

Metz Industries stock is twice as risky as the market on average. Given an expected return on the market of A. ​7.35% B. ​16.50% C. ​21.50% D. ​14.00% ​9.5%, and a​ risk-free rate of​ 2.50%, according to​ CAPM, what is the expected return for Metz​ Industries?

Answer 1

Answer:

B. ​16.50%

Explanation:

We know,

according to Capital Asset Pricing Model​ (CAPM), the expected return, E(r) = risk-free rate + (expected return on the market - risk-free rate) × beta

Given,

Risk-free rate = 2.50%

Expected return on the market = 9.5%

Beta = 2 (We know market beta is 1. As Metz Industries stock twice as risky as the market on average, the beta of the company is 1×2 = 2.)

Putting the values in to the formula, we can get,

The expected return, E(r) = 2.50% + (9.5%- 2.50%) × 2

E(r) = 2.50% + 7% × 2

E(r) = 2.50% + 14%

E(r) = 16.5%

Therefore, the option B is the answer.