Question

The risk-free rate is 3.8 percent and the market expected return is 11.5 percent. What is the expected return of a stock that has a beta of 1.23?

Answer 1

Answer:Expected return=13.27%

Explanation:

Using the CAPM,  capital asset pricing model formula

we have that

Expected return = Risk free rate + Beta ( Market risk premium)

Expected return = Risk free rate + Beta ( Market expected return - Risk free rate

Er =  rf +β( rm - rf )

 Expected return=3.8% + 1.23 ( 11.5% -3.8%)

Expected return=0.038 + 1.23 (0.115-0.038)

Expected return = 0.038 + 1.23 x 0.077

Expected return = 0.038 +0.09471

Expected return = 0.13271 x 100 = 13.27%