Question - CAPM and Beta

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Magnusdottir, Student (University), Iceland
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

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%.

  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

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%.

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