The expected return on the market portfolio is 13%. The risk free rate is 5%. The beta on GM is 1.1. According to the CAPM, what is the expected return on GM?
A) 13%
B) 13.8%
C) 14%
D) 15%

Question

The expected return on the market portfolio is 13%.  The risk free rate is 5%.  The beta on GM is 1.1.  According to the CAPM, what is the expected return on GM? 
A) 13%
B) 13.8%
C) 14%
D) 15%

Quizplus · Accepted Answer

According to the CAPM model: 
Expected return on GM = Risk-free rate + Beta*(Market return – Risk-free rate)
Risk-free rate = 2%
Beta of GM = 1.2
Market return = 10%
Expected return on GM = 2% + 1.2*(10% -2%) = 13.8%.
Therefore, the best choice is B.

The Expected Return on the Market Portfolio Is 13