Question

Need it ASAP, thanks

Here is a stock:

The beta is 1.65.

The expected return on the market is 8.3%.

The risk-free rate is 2.2%.

According to the Capital Asset Pricing Model, what must the expected return of this stock be?

	A.	15.61%
	B.	12.27%
	C.	9.86%
	D.	10.52%

Answer 1

Sol:

Beta = 1.65

Market expected return = 8.3%

Risk free rate = 2.2%

To determine expected return of this stock be based on the Capital Asset Pricing Model (CAPM)

Expected Return on Stock = Risk free rate + Beta x (Market risk premium - Risk free rate)

Expected Return on Stock = 2.2% + 1.65 x (8.3% - 2.2%)

Expected Return on Stock = 2.2% + (1.65 x 6.1%)

Expected Return on Stock = 0.022 + 0.10065

Expected Return on Stock = 0.12265 or 12.27%

Therefore expected return of this stock be based on the Capital Asset Pricing Model is 12.27%

Answer = B. 12.27%