If you know the risk-free rate, the market risk-premium, and the beta of a stock, then using the Capital Asset Pricing Model (CAPM) you will be able to calculate the expected rate of return for the stock.

Question

Quizplus · Accepted Answer

The CAPM formula is:

Expected Return = Risk-Free Rate + (Market Risk Premium x Beta)

So if you know the risk-free rate, market risk premium, and beta of a stock, you can use the CAPM to calculate its expected rate of return.

If You Know the Risk-Free Rate, the Market Risk-Premium, and the Beta