A stock has a beta coefficient, β, equal to 1.20. The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____.
A)9.8%
B)5.2%
C)12.5%
D)15.8%
E)17.2%

Question

A stock has a beta coefficient, β, equal to 1.20. The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____. 
A)9.8%
B)5.2%
C)12.5%
D)15.8%
E)17.2%

Quizplus · Accepted Answer

The appropriate return is calculated using the CAPM formula: Expected Return = Risk-Free Rate + Beta * Market Risk Premium = 5% + 1.20 * 9% = 15.8%.

A Stock Has a Beta Coefficient, β, Equal to 1