Question

The stock market in the past week had declined 17%. The Risk free rate is 3%, the Green Shoe Company’s stock beta is 1.25 and the markets expected long term return is 12%. An investor’s long term expected return from the Green Shoe Company’s stock would be?

Answer 1

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 3 + 1.25 * (12 - 3)

Expected return% = 14.25