Question

Your estimate of the market risk premium is 7​%. The​ risk-free rate of return is 3.3​% and General Motors has a beta of 1.3. According to the Capital Asset Pricing Model​ (CAPM), what is its expected​ return?

Answer 1

COst of equity using CAPM = 12.4%

Step-by-step explanation:

the market premium is the diference between the market rate and the risk-free rate.

We plug the values into the formula for CAPM and solve for cost of equity

`Ke= r_f + \beta (r_m-r_f)`

risk free 0.033

premium market = (market rate - risk free) 0.07

beta(non diversifiable risk) 1.3

`Ke= 0.033 + 1.3 (0.07)`

Ke 0.12400 12.4%

The expected return will be 12.4%