Question

a.  Compute the expected rate of return for Intel common​ stock, which has a 1.4 beta. The​ risk-free rate is 3

percent and the market portfolio​ (composed of New York Stock Exchange​ stocks) has an expected return of 12 percent.

b.  Why is the rate you computed the expected​ rate?

P8-13 (similar to) Question Help (Expected rate of return using CAPM) a. Compute the expected rate of return for Intel common stock, which has a 1.4 beta. The risk-free rate is 3 percent and the market portfolio (composed of New York Stock Exchange stocks) has an expected retum of 12 percent. b. Why is the rate you computed the expected rate? a. The expected rate of return for Intel common stock is % (Round to one decimal place.) Enter your answer in the answer box and then click Check Answer. part 1 remaining Clear All Check Answer

Answer 1

a.The expected rate of return is calculated using the Capital Asset Pricing Model (CAPM) which is calculated using the formula below:

Ke=Rf+b[E(Rm)-Rf]

where:

Rf=risk-free rate of return

Rm=expected rate of return on the market

= 3% + 1.4*(12% - 3%

= 3% + 1.4*9%

= 3% + 12.60

= 15.60%.

b.The rate of 15.60% is the expected rate since it compensates for the time value of money and for assuming risk.

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