Treize Industries' common shares has an expected return of 13% and a beta of 1.3.If the expected risk-free return is 3%, what is the expected return for the market (round your answer to the nearest .1%)?
A)7.7%
B)9.6%
C)10.0%
D)10.7%

Question

Quizplus · Accepted Answer

The CAPM formula is:

Expected return of a security = Risk-free rate + Beta(Risk premium)

Given:

Expected return of Treize Industries' common shares = 13%
Beta of Treize Industries' common shares = 1.3
Expected risk-free rate = 3%

We need to find the expected return for the market.

Using the CAPM formula, we can rearrange the formula to solve for the market risk premium:

Market risk premium = (Expected return of Treize Industries' common shares - Expected risk-free rate) / Beta of Treize Industries' common shares

Market risk premium = (13% - 3%) / 1.3
Market risk premium = 7.69%

Therefore, the expected return for the market is:

Expected return for the market = Risk-free rate + Market risk premium
Expected return for the market = 3% + 7.69%
Expected return for the market = 10.7%

Hence, the best choice is D.

Treize Industries' Common Shares Has an Expected Return of 13