Question

You are analyzing a stock that has a beta of 1.11.

The​ risk-free rate is 4.3% and you estimate the market risk premium to be 6.4%. If you expect the stock to have a return of 11.3% over the next​ year, should you buy​ it? Why or why​ not? The expected return according to the CAPM is? (Round to two decimal​ places.)

Answer 1

Risk-free return (Rf) = 4.3%

Market risk premium (Rm - Rf) = 6.4%

Beta = 1.11

Required return = Rf + Beta * (Rm - Rf)

= 4.3% + 1.11 * (6.4%)

Expected return according to CAPM = 11.40%

but the Actual expected return = 11.30%, Which is lower than the required return of 11.40%.

So, it is advisable that Not to buy the stock. because i expect 11.40% on my investment, but actually i will get 11.30%, which is lesser. so, investor won't purchase the stock.

CAPM return = 11.40%