Question

The T-bill rate is 4% and the market risk premium is 6%. Using CAPM, find the expected rate of return for a stock whose beta is 1.2. Express your answer to one decimal place and do not include percent sign (e.g., if your answer is 33%, type "33" only).

Answer 1

Answer:

11.2%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

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

= 4% + 1.2 × 6%

= 4% + 7.2%

= 11.2%

The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.