Question - CAPM and Beta

Capital Asset Pricing Model
Knowledge Center


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...


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

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%.

Muqeem Razvi, Pakistan

CAPM, Calculating Expected Return

E(r) will be
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%.


More on Capital Asset Pricing Model:
Discussion Topics
Can Beta of a Stock be 0? And can Beta be Negative?
Application of Capital Asset Pricing Model in Pakistan
Raw Beta vs Adjusted Beta
🔥How to Use CAPM for Project Analysis?
Calculating Beta of Portfolio after Portfolio Change
👀Question - CAPM and Beta
CAPM is Irrelevant to Use
CAPM usage by Fund Managers
Why Sharp Increase in the Calculation for Betas
Are US Treasury Bills still Zero Beta?
Calculating Company Beta
CAPM Model and Calculating the Inflation Rate?
Concept of Marginality and CAPM
What is Beta? Explanation and a Few Remarks
Special Interest Group

Do you know a lot about Capital Asset Pricing Model? Become our SIG Leader

Capital Asset Pricing Model
Knowledge Center

About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
2023 12manage - The Executive Fast Track. V16.1 - Last updated: 5-2-2023. All names of their owners.