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...

  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%.

  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%.

  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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