The risk-free rate and the expected market rate of return are 0.04 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.4 is equal to
A) 6%
B) 14.4%
C) 12%
D) 15.2%
E) 18%

Question

Quizplus · Accepted Answer

According to CAPM, the expected return = risk-free rate + beta * (market return - risk-free rate). So, 0.04 + 1.4 * (0.12 - 0.04) = 0.152 or 15.2%.

The Risk-Free Rate and the Expected Market Rate of Return