Question - CAPM and Beta

      
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		            		Magnusdottir
Student (University), Iceland
			            
Question - CAPM and Beta

	          		The beta of stock A is 0,8.

The risk free rate is 6%.

The market risk premium is 8,5%.

Assume the CAPM theory holds. What is the expected return of stock A? Can somebody help me with how this question is solved. Thanks...
				      
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						            	Paul Kinnaird
Student (University), United States
												
				                CAPM and Beta Example

													The Capital Asset Pricing Model for stock A would be written:

RoR = Rate of Return

RFR = Risk Free Return

RoR for stock A = RFR + Beta(RoR for market - RFR)

The difference between the market RoR and the RFR is the market risk premium.

Therefore:

RoR for A = 6 + 0.8(8.5) = 12.8%.
				                
										              0

						            	abdollah
Student (Other), Iran
												
				                CAPM and Beta

													In fact, the expected market return is: 8.5 + 6 = 14.5%

And the expected return of stock A is: 12.8%.
				                
										              0

						            	Muqeem Razvi, Pakistan
												
				                CAPM, Calculating Expected Return

													If

B=0.8

Rf=6%

Rm-Rf=8.5,

Then

E(r) will be

12.8%,

Market risk premium is equal to Rm (Return on market portfolio) minus Rf (Risk free rate), that will be

RPm = Rm - Rf

RPm = 14.5 - 6

RPm = 8.5

, then

E(r)i = Rf + (Rm - Rf)B

E(r)i = 6 + (14.5 - 6)0.8

E(r)i = 12.8%.
				                
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