Bell Weather, Inc. has a beta of 1.25. The return on the market portfolio is 12.5%, and the risk-free rate is 5%. According to CAPM, what is the required return on this stock?
A) 20.62%
B) 9.37%
C) 14.38%
D) 15.62%

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: Expected Return = 5% + 1.25 * (12.5% - 5%) = 5% + 1.25 * 7.5% = 5% + 9.38% = 14.38%.