Question
According to Capital asset pricing model (CAPM), what
is the expected rate of return for a stock with a beta of 1.2, when the risk-free rate is 5% and market rate of return is 11%?Solution
According to CAPM Expected return on a stock is equal to = risk free rate + beta (market rate – risk free rate) = 0.05 + 1.2 (0.11 – 0.05) = 0.05 + 1.2 (0.06) = 0.122 ~ 12.2%
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