A stock has a Beta of 1.23, the expected return on the S&P 500 market index...
A stock has a Beta of 1.23, the expected return on the S&P 500 market index is 5.6%, and the return on T-Bills is 1.5%. Using the CAPM, what is the expected return on this stock? Enter your answer as a decimal with a leading zero and 4 decimal places of precision (i.e. 0.1234).
Homework Answers
Based on CAPM,
Expected return on stock = Risk free rate + Beta * (Expected market return - Risk free rate)
Expected return on stock = 1.5% + 1.23 * (5.6% - 1.5%)
Expected return on stock = 1.5% + 5.043%
Expected return on stock = 6.543%
Hence, answer = 0.0654
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