Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?
A) 37.5%
B) 31.5%
C) 26.5%
D) 23.5%

Question

Quizplus · Accepted Answer

According to CAPM, the required rate of return for a stock is equal to the risk-free rate plus the product of the market risk premium (the difference between the expected return on the market portfolio and the risk-free rate) and the stock's beta. Mathematically, it is represented as:

Required rate of return = Risk-free rate + Beta x (Expected market return - Risk-free rate)

Plugging in the given values:

Required rate of return = 4% + 2.5 x (15% - 4%)

Required rate of return = 4% + 2.5 x 11%

Required rate of return = 4% + 27.5%

Required rate of return = 31.5%

Therefore, the correct answer is B) 31.5%.