If the risk-free rate is 3%, the expected market return is 9%, and the stock's beta is 1.0, what is the expected return according to CAPM?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

If the risk-free rate is 3%, the expected market return is 9%, and the stock's beta is 1.0, what is the expected return according to CAPM?

CAPM uses the idea that expected return equals the risk-free rate plus a premium for taking on market risk. The formula is E[r] = rf + beta × (E[rm] − rf). With rf = 3%, E[rm] = 9%, and beta = 1, the calculation is 3% + 1 × (9% − 3%) = 3% + 6% = 9%. So the stock’s expected return is 9%.

If you see the other numbers: 6% would be only the market risk premium and ignores the risk-free base, 12% would be adding the whole market return to the risk-free rate (double-counting), and 9.5% would come from a miscalculation of the premium.

If the risk-free rate is 3%, the expected market return is 9%, and the stock's beta is 1.0, what is the expected return according to CAPM?

Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

If the risk-free rate is 3%, the expected market return is 9%, and the stock's beta is 1.0, what is the expected return according to CAPM?

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