The beta of Elsenore, Ltd., share is 1.6, whereas the risk-free rate of return is 8 per cent. If the expected return on the market is 15 per cent, then what is the expected return on Elsenore?
A) 11.20%
B) 19.20%
C) 24.00%
D) 32.00%

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is:

Expected Return on a Security = Risk-Free Rate + Beta x (Expected Market Return - Risk-Free Rate)

Substituting the given values, we get:

Expected Return on Elsenore = 8% + 1.6 x (15% - 8%) 
Expected Return on Elsenore = 8% + 1.6 x 7%
Expected Return on Elsenore = 8% + 11.20%
Expected Return on Elsenore = 19.20%

Therefore, the expected return on Elsenore is 19.20%. Hence, the correct choice is B.

The Beta of Elsenore, Ltd