The stock of Big Joe's has a beta of 1.38 and an expected return of 16.26 percent.The risk-free rate of return is 3.42 percent.What is the expected return on the market?
A)7.60 percent
B)8.04 percent
C)9.30 percent
D)12.72 percent
E)12.16 percent

Question

Quizplus · Accepted Answer

Using the capital asset pricing model (CAPM):

Expected return on the market = Risk-free rate + Beta of the stock * (Expected return on the market - Risk-free rate)

16.26% = 3.42% + 1.38 * (Expected return on the market - 3.42%)

Solving for Expected return on the market:

Expected return on the market = (16.26% - 3.42%) / 1.38 + 3.42% = 12.72%

Therefore, the expected return on the market is 12.72%.

The Stock of Big Joe's Has a Beta of 1