The risk-free rate of return is currently 3 per cent, whereas the market risk premium is 6 per cent. If the beta of Lenz, Ltd., share is 1.8, then what is the expected return on Lenz?
A) 8.40%
B) 10.80%
C) 13.80%
D) 19.20%

Question

Quizplus · Accepted Answer

The expected return on Lenz can be calculated using the Capital Asset Pricing Model (CAPM) as follows:
Expected Return = Risk-free Rate + (Beta × Market Risk Premium)
Expected Return = 3% + (1.8 × 6%)
Expected Return = 3% + 10.8%
Expected Return = 13.8%
Therefore, the expected return on Lenz is 13.8%, which corresponds to option C.

The Risk-Free Rate of Return Is Currently 3 Per Cent