The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
A)0.06.
B)0.144.
C)0.12.
D)0.132.

Question

Quizplus · Accepted Answer

The CAPM formula is:
Expected return = risk-free rate + beta*(market return - risk-free rate)

Plugging in the numbers,
Expected return on security X = 0.06 + 1.2*(0.12 - 0.06) = 0.132.

Therefore, the correct choice is D.

The Risk-Free Rate and the Expected Market Rate of Return