The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to
A)0.142.
B)0.144.
C)0.153.
D)0.134.

Question

Quizplus · Accepted Answer

The correct answer is A because the expected rate of return on a security with a beta of 1.25 is equal to the risk-free rate plus the beta of the security multiplied by the expected market rate of return minus the risk-free rate. In this case, the expected rate of return on a security with a beta of 1.25 is equal to 0.056 + 1.25 * (0.125 - 0.056) = 0.142.

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