Question

A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9 percent. What must the expected return on the market be

Answer 1

Answer:

11.26%

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)

rm = expected return on the market

11.85 = 3.9 + 1.08(rm - 3.9)

11.85 - 3.9 =  1.08(rm - 3.9)

7.95 = 1.08(rm - 3.9)

7.95 / 1.08 = rm - 3.9

7.361 = rm - 3.9

rm = 11.26