Question

In February 2017 the risk-free rate was 4.37 percent, the market risk premium was 7 percent, and the beta for Twitter stock was 1.56. What is the expected return that was consistent with the systematic risk associated with the returns on Twitter stock? (Round answer to 2 decimal places, e.g. 17.54%.)

Answer 1

As per CAPM,

R_f = Risk free Return = 4.37%                                                    

R_m = Market return = 7%

beta of Twitter or Systematic Risk = 1.56

As Expected Return is consisted with Systematic Risk, the Required rate of return is same as Expected Return

Expected Return = 4.37% + 1.56(7%)

= 15.29%

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