Stock Z has a beta of 0.9 and a required rate of return of 12%.What is the market rate of return if the risk-free rate is 5.25%?
A)7.50%
B)12.75%
C)13.33%
D)18.58%

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model (CAPM):
Required Rate of Return = Risk-Free Rate + Beta x (Market Rate of Return - Risk-Free Rate)
We know:
Beta = 0.9
Required Rate of Return = 12%
Risk-Free Rate = 5.25%
Plugging in the values:
12% = 5.25% + 0.9 x (Market Rate of Return - 5.25%)
6.75% = 0.9 x (Market Rate of Return - 5.25%)
Market Rate of Return - 5.25% = 6.75%/0.9
Market Rate of Return - 5.25% = 7.5%
Market Rate of Return = 7.5% + 5.25% = 12.75%
Therefore, the correct answer is B.

Stock Z Has a Beta of 0