Question

You own a stock that has an expected return of 15.72 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market

Answer 1

Answer: expected rate of return on the market=12.77%

Explanation:

Given that

Expected return =15.72 percent

beta =1.33

Risk free rate=3.82 percent

According to the CAPM FORMULA,

Expected return = Risk free rate+ Beta( expected rate of return on market - Risk free rate

15.72% = 3.82 % + 1.33 ( Em - 3.82%)

0.1572=0.0382+ 1.33 Em - 0.050806

0.1572- 0.0382+ 0.050806 = 1.33 Em

0.169806=1.33Em

Em = 0.169806/1.33

=0.12767 x 100

12.767 ≈12.77%

expected rate of return on the market=12.77%