# Question - CAPM and Beta

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 MagnusdottirStudent (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...

 Paul KinnairdStudent (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%.

 abdollahStudent (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%.

 Muqeem Razvi 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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