The following information about the Stok trades in the U.S through New York Stock Exchange The beta of the stock is 1.50 Risk – free rate = 3 Market Return premium= 6 What is the Expected return of the stock using the CAPM formula ?
Question
The following information about the Stok trades in the U.S through New York Stock Exchange The beta of the stock is 1.50 Risk – free rate = 3 Market Return premium= 6 What is the Expected return of the stock using the CAPM formula ?
Solution
The Capital Asset Pricing Model (CAPM) is used to calculate the expected return of a stock. The formula for CAPM is:
Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
Given the values from the question:
Risk-Free Rate = 3% Beta = 1.50 Market Return Premium = 6%
We can substitute these values into the formula:
Expected Return = 3% + 1.50 * (6% - 3%)
Solving the equation:
Expected Return = 3% + 1.50 * 3% Expected Return = 3% + 4.5% Expected Return = 7.5%
So, the expected return of the stock, according to the CAPM formula, is 7.5%.
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