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    Question

    According to Capital asset pricing model (CAPM), what is the expected rate of return for a stock with a beta of 1.2, when the risk-free rate is 5% and market rate of return is 11%?

    A 12% Correct Answer Incorrect Answer
    B 7.2% Correct Answer Incorrect Answer
    C 12.2% Correct Answer Incorrect Answer
    D 5% Correct Answer Incorrect Answer
    E 8% Correct Answer Incorrect Answer

    Solution

    According to CAPM Expected return on a stock is equal to = risk free rate + beta (market rate – risk free rate) = 0.05 + 1.2 (0.11 – 0.05) = 0.05 + 1.2 (0.06) = 0.122 ~ 12.2%

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