 # Question - CAPM and Beta   5 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...

Rating   0 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%. Leave a comment

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