The stock of Big Joe's has a beta of 1.14 and an expected return of 11.6%. The risk-free rate of return is 4%. What is the expected return on the market?
A) 7.60%
B) 8.04%
C) 9.33%
D) 10.67%
E) 12.16%

Question

Quizplus · Accepted Answer

The expected return on the market can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging to find the Market Return: Market Return = (Expected Return - Risk-Free Rate) / Beta + Risk-Free Rate = (11.6% - 4%) / 1.14 + 4% = 10.67%.

The Stock of Big Joe's Has a Beta of 1