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Question  CAPM and Beta Magnusdottir, Member
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...




CAPM and Beta ExamplePaul Kinnaird, Member 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%. 



CAPM and Betaabdollah, Member In fact, the expected market return is: 8.5 + 6 = 14.5%
And the expected return of stock A is: 12.8%. 



CAPM, Calculating Expected ReturnMuqeem Razvi, Member If
B=0.8
Rf=6%
RmRf=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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