Question

according to the capital asset pricing model capm what is the expected market retrun on a security of 9.5% a stock beta of 1.2 and a risk free interest rate of 2%

Answer 1

Expected market return on a security is 9.92 %.

Step-by-step explanation:

The Capital Asset Pricing Model (CAPM) is used to calculate the cost of equity for a firm as

Cost of Equity = Return on Risk Free Security + Beta × Risk Premium

Where,

Risk Premium = Return on Market Portfolio - Return on Risk Free Security

= Rm - 0.02.

Thus market return (Rm) can be determined as,

0.095 = 1.20 × (Rm - 0.02)

0.095 = 1.20 Rm - 0.024

1.20 Rm = 0.119

Rm = 0.0992 or 9.92 %