Question

Capital Asset Pricing Model

Studies have found that Beta is not the only factor that matters for determining the expected return on a stock a. Mention and explain 3 other factors that impact the expected return of the stock and how they could affect it.

Answer 1

Capital Asset Pricing Model

Expected Return = Risk-Free Rate + Beta (Market Return – Risk-Free Rate

example:-  if the risk free rate is 10%, the market return is 20%, and the stock's beta is 2, then the expected return on the stock would be 30%. 30% = 10% + 2 (20% – 10%)

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.

The beta of a potential investment is a measure of how much risk the investment will add to a portfolio that looks like the market. If a stock is riskier than the market, it will have a beta greater than one. If a stock has a beta of less than one, the formula assumes it will reduce the risk of a portfolio.

Factors that influence your rate of return include the mix of assets, the business's strategy and operations, the state of the economy, political stability, fiscal policy and regulations.

Required rate of return is the minimum rate of return which a firm has to earn. ... Expected rate of return is that rate of return which a firm expects from the investment. For example the capital borrowed from the bank is invested in a project from where 6% of return is expected.