Question

Apple has a Beta of 1.25. Assume that the risk-free rate of interest is 3% and that you expect the stock market will return 8% over the next year. According to the Capital Asset Pricing Model (CAPM), the expected return of Apple is

Answer 1

9.25%

Step-by-step explanation:

The computation of the expected return under the Capital Asset Pricing Model (CAPM) is shown below:

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 3% + 1.25 × (8% - 3%)

= 3% + 1.25 × 5%

= 3% + 6.25%

= 9.25%

The (Market rate of return - Risk-free rate of return) is also known as the market risk premium