Question
The expected return on the stock is 15%, the risk-free
rate is 8% and the beta for the stock is 1.2. Compute the rate of return that would be expected on the stock.Solution
According to CAPM Expected return on a stock is equal to = risk free rate + beta (market rate – risk free rate) = 0.08 + 1.2 (0.15 – 0.08) = 0.164 = 16.4%
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