You are analyzing a stock that has a beta of 1.11.
The risk-free rate is 4.3% and you estimate the market risk premium to be 6.4%. If you expect the stock to have a return of 11.3% over the next year, should you buy it? Why or why not? The expected return according to the CAPM is? (Round to two decimal places.)
Risk-free return (Rf) = 4.3%
Market risk premium (Rm - Rf) = 6.4%
Beta = 1.11
Required return = Rf + Beta * (Rm - Rf)
= 4.3% + 1.11 * (6.4%)
Expected return according to CAPM = 11.40%
but the Actual expected return = 11.30%, Which is lower than the required return of 11.40%.
So, it is advisable that Not to buy the stock. because i expect 11.40% on my investment, but actually i will get 11.30%, which is lesser. so, investor won't purchase the stock.
CAPM return = 11.40%
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