Question

A stock has an expected return of 10 percent, its beta is .75, and the risk-free...

A stock has an expected return of 10 percent, its beta is .75, and the risk-free rate is 5.5 percent.

Required:

What must the expected return on the market be?

Please show how to do in excel

A. 12.07

B. 6

C. 11.50

D. 11.96

E. 10.93

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Homework Answers

Answer #1

Solution :

As per Capital asset pricing model

Required return on equity ( Re) = risk free return(Rf) +[ Return on market portfolio(Rm) - Rf] * beta

10= 5.5 +(Rm - 5.5) * 0.75

10 - 5.5 = 0.75 Rm - 4.125

4.5 + 4.125 = 0.75 Rm

8.625 / 0.75 =Rm

Rm = 11.5 %

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