Farm Tractors, Inc., stock has a beta of 1.12 and an expected return of 12.8%. The risk-free rate is 3.84%. What is the market rate of return?
A)6.67%
B)8.90%
C)9.08%
D)11.84%
E)12.63%

Question

Quizplus · Accepted Answer

The market rate of return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate). Rearranging the formula to solve for the Market Rate of Return gives: Market Rate of Return = ((Expected Return - Risk-Free Rate) / Beta) + Risk-Free Rate. Plugging in the given values: Market Rate of Return = ((12.8% - 3.84%) / 1.12) + 3.84% = 11.84%.