A stock has an expected return of 13.6 percent and a beta of 1.10. If the risk-free rate is 5.4 percent, what is the expected return of the market?
A) 12.60%
B) 13.05%
C) 12.85%
D) 12.59%
E) 7.45%

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) can be used to calculate the expected return of the market using the stock's expected return, beta, and the risk-free rate. The formula is as follows:

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

Substituting the given values, we get:

Expected return of the market = 5.4% + 1.1 x (13.6% - 5.4%) = 12.85%

Therefore, the expected return of the market is 12.85%, which corresponds to option C.

A Stock Has an Expected Return of 13