Question

Expected market portfolio return for the next year is 11%, risk free rate is expected to be 3.5%,β of company XYZ stock is 0.8. Expected return of company XYZ stock next year is:

		9.5%
		7.3%
		5.2%
		8.8%

Answer 1

Solution:-

To Calculate Expected Return of Company XYZ Stock next year-

As per Capital Assets Pricing Model-

Expected Return = Risk free Rate + Beta * (Market Return - Risk Free Rate)

Expected Return = 0.035 + 0.80 * (0.11 - 0.035)

Expected Return = 0.035 + 0.80 * 0.075

Expected Return = 0.035 + 0.06

Expected Return = 9.5%

The Correct Answer is point A i.e. 9.50%

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