Question

If the return on the risk-free security is 3% and the return on Digital Computer Incorporated is expected to be 18% (with beta of 1.5), what must be the return on the market, according to CAPM

Answer 1

The return on the market, according to CAPM is 25.5%

Return on the market

Using this formula

Return=Risk free rate+beta(Market return-Risk free rate)

Let plug in the formula

Return=3%+1.5(18%-3%)

Return=3%+1.5(15%)

Return=3%+22.5%

Return=25.5%

Inconclusion the return on the market, according to CAPM is 25.5%.

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