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Magnusdottir
Student (University), Iceland
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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... (...) Read more? Sign up for free
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Paul Kinnaird
Student (University), United States
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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%.
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abdollah
Student (Other), Iran
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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%.
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Muqeem Razvi
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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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