Question

You are analyzing two assets: collectible LEGO sets, and stock of Apple. In the last 5 years, LEGOs have had an annual volatility of 5%, annual return of 6%, and a CAPM beta (the correlation coefficient between the asset and the market risk-premium) of 1.6. Apple has had an annual volatility of 10%, an annual return of 8%, and a CAPM beta of 1.2.

If the risk-premium of the market is currently 7% and the risk-free rate is 2%, what is the expected return of LEGO sets this year in %?  
(HINT: remember that CAPM beta is the sensitivity to the market risk premium:  
To calculate expected return, use E(r) = rf + beta* (market – rf) as opposed to E(r) = beta*market

answer in % (please round to 1 decimal place)

Answer 1

Answer:-

For LEGO sets
beta = 1.6
risk free rate (rf) = 2%

market risk premium = market - rf = 7%

E(r) = rf + beta x (market -rf)
E(r) = 2% + 1.6 x 7%
E (r) = 13.2%

Therefore the expected return of LEGO sets this year is 13.2%