Collectibles 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 formula, 
Required rate of return = Risk-free rate + Beta*(Market return - Risk-free rate)
= 4% + 2.5*(15% - 4%)
= 31.5%
Therefore, the required rate of return on Collectible's stock is 31.5%. The correct answer is option B.