Question

According to the CAPM, what is the expected market return given a required return on a security of 14.6%, a stock beta of 1.2, and a risk-free interest rate of 5%

Answer 1

13%

Step-by-step explanation:

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

14.6% = 5% + 1.2(market rate of return - 5%)

14.6% = 5% + 1.2 x market rate of return - 6%

14.6% = -1%+ 1.2 x market rate of return

14.6% + 1% = + 1.2 x market rate of return

15.6% = + 1.2 x market rate of return

15.6% / 1.2 = market rate of return

market rate of return = 13%