Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a share with an expected return of 17%?
A).5
B).7
C)1
D)1.2

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), we have the formula:
Expected return = risk-free rate + beta*(expected market return - risk-free rate)
We know the risk-free rate is 5% and the expected return on the market is 15%. We can rearrange the formula to solve for beta:
Beta = (Expected return - risk-free rate) / (expected market return - risk-free rate)
Plugging in the values, we get:
Beta = (17% - 5%) / (15% - 5%) = 1.2
Therefore, the answer is D.