If the riskfree interest rate is 5%, the market price of risk is 6%, and the beta is 0.5, then, according to the classical single-factor CAPM, what is the equilibrium expected total return for investment in the asset in question?
A) 3%
B) 6%
C) 8%
D) 11%
E) 17%

Question

Quizplus · Accepted Answer

The CAPM formula is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Here, the market price of risk is the excess return of the market over the risk-free rate, which is 6%. So, the expected return = 5% + 0.5 * 6% = 5% + 3% = 8%.

If the Riskfree Interest Rate Is 5%, the Market Price