If 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 the appropriate return should be ____.
A)9.8%
B)14%
C)5%
D)15.8%
E)None of the above is correct.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) is expressed as:
Expected Return = Rf + β * (Rm-Rf)
Rf = Risk-free rate = 5%
β = Beta Coefficient = 1.20
Rm-Rf = Risk Premium = 9% - 5% = 4%
Expected Return = 5% + 1.20 * 4% = 5% + 4.8% = 9.8%
Therefore, the appropriate return should be 9.8%, which is option D.

If a Stock Has a Beta Coefficient, β, Equal to 1.20