Shares in a company are perfectly correlated with the market return. The risk free rate of return is 5 per cent and the risk premium is 6 per cent. What is the expected return?
A) 30%
B) 11%
C) 1%
D) 1.2%

Question

Quizplus · Accepted Answer

To calculate the expected return, we use the formula: 
Expected Return = Risk Free Rate + Beta * Market Risk Premium

Since the shares are perfectly correlated with the market, the beta will be 1.

Expected Return = 5% + 1 * 6% 
Expected Return = 11%

Therefore, the answer is B) 11%.

Shares in a Company Are Perfectly Correlated with the Market