A risk-free rate of 5% and an expected market return of 12%, the CAPM predicts an expected return of which of the following, given a beta of 1.6:
A) 17%.
B) 21%.
C) 15%.
D) 16.2%.

Question

Quizplus · Accepted Answer

The CAPM formula is: Expected return = Risk-free rate + Beta * (Expected market return - Risk-free rate). Plugging in the given values, we get: Expected return = 5% + 1.6 * (12% - 5%) = 16.2%.

A Risk-Free Rate of 5% and an Expected Market Return