Question

you analyze Samsung stock find it’s beta 1.3 the expected market return 4% and the risk free rate 1%? according to CAPM, what is samsungs expected return?

a) 6.2% b) 5.2% c) 4.9 d) 3.9

Answer 1

As per Capital Asset Pricing Model,

Re = Rf + (Rm – Rf) x Beta

Where,

Re = Expected rate of return

Rf = Risk free rate of return = 1%

Rm = Market rate of return = 4%

Beta = Beta of the stock = 1.3

So, Re = 1 + (4 – 1) x 1.30

= 4.9%

So, as per above calculations, option c is the correct option