Question

a stock has a beta of 1.0 and an expected return of 12 percent. a risk-free asset currently earns 3.6 percent.

Answer 1

To calculate the expected return of a stock using the Capital Asset Pricing Model (CAPM), you can use the following formula:

Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

Given the information you provided:

- Beta = 1.0

- Expected Return of the stock = 12%

- Risk-Free Rate = 3.6%

Let's calculate the market return first by adding the risk-free rate to the expected return:

Market Return = Risk-Free Rate + Expected Return of the stock - Risk-Free Rate

Market Return = 3.6% + 12% - 3.6%

Market Return = 12%

Now, we can substitute the values into the CAPM formula:

Expected Return = 3.6% + 1.0 × (12% - 3.6%)

Expected Return = 3.6% + 1.0 × 8.4%

Expected Return = 3.6% + 8.4%

Expected Return = 12%

To calculate the expected return of a stock using the Capital Asset Pricing Model (CAPM), you can use the following formula:

Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

Given the information you provided:

- Beta = 1.0

- Expected Return of the stock = 12%

- Risk-Free Rate = 3.6%

Let's calculate the market return first by adding the risk-free rate to the expected return:

Market Return = Risk-Free Rate + Expected Return of the stock - Risk-Free Rate

Market Return = 3.6% + 12% - 3.6%

Market Return = 12%

Now, we can substitute the values into the CAPM formula:

Expected Return = 3.6% + 1.0 × (12% - 3.6%)

Expected Return = 3.6% + 1.0 × 8.4%

Expected Return = 3.6% + 8.4%

Expected Return = 12%

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