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
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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