Question

5 1 point An investor is considering an investment in General Motors (GM). The current risk-free rate is 2.05%, the beta for GM is 1.47, and the market risk premium is estimated at 7.1%. What is the required return for GM based on CAPM? Enter your answer in decimal form out to four decimals. For example, you would enter .1050 (for 10.5%).

Answer 1

The required return for General Motors (GM) based on the Capital Asset Pricing Model (CAPM) is approximately 0.1239 or 12.39%.

Step-by-step explanation:

The CAPM formula takes into account the risk-free rate, the beta of the stock, and the market risk premium.

In this case, the risk-free rate is given as 2.05% (or 0.0205 as a decimal), which represents the return on a risk-free investment such as government bonds.

The beta for GM is given as 1.47, which measures the stock's sensitivity to market movements.

The market risk premium is estimated at 7.1% (or 0.071 as a decimal), representing the additional return investors expect to receive for taking on the risk of investing in the overall market.

By plugging these values into the CAPM formula and performing the calculations, we find that the required return for GM is approximately 12.39%. This indicates the minimum return that investors would expect from GM stock, considering its risk level and the overall market conditions.