Question
If a stock's expected return is 18%, the risk-free rate
is 6%, and the market return is 12%, what is the stock's beta according to the CAPM?Solution
Using the CAPM formula and rearranging to solve for beta: Expected return = Risk – Free Rate + (Beta x Market Risk Premium) 18% = 6% + (Beta x (12% - 6%)) = 2
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