You are considering the purchase of a stock with a beta of 1.20. If the market...
You are considering the purchase of a stock with a beta of 1.20. If the market risk premium is 7% and the risk‐free rate is 2.35%, use the Capital Asset Pricing Model (CAPM) to estimate the expected return on this stock.
Homework Answers
Based on CAPM,
Expected Return on Stock = Risk free rate + Beta * Market risk premium
Expected return on stock = 2.35% + 1.20 * 7%
Expected return on stock = 10.75%
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