Question

a. If the interest rate on Treasury bills is 5% and the expected return on the market portfolio is 15%, what is the expected return on the shares of the law firm according to the CAPM

Answer 1

Answer: 2%

Explanation:

The Capital Asset Pricing Model (CAPM) can be used to calculate expected value as thus;

= Risk free rate + beta (Market return - risk free rate)

= 5% + (-0.3) (15% - 5%)

= 5% - 3%

= 2%