A stock has a beta of 134 the expected return on the market

A stock has a beta of 1.34, the expected return on the market is 9%, and the risk-free rate is 3%. According to the CAPM, what is the expected return on this stock?

A-12.06%

B-11.04%

C-19.08%

D-9.31%

Solution

As per CAPM model, the equation for the calcculation of expected return on stock is as follows:-

Re = Rf + B( Rm - Rf ).

where,

Re = Ecpected return on stock.

Rf = Risk free rate i.e. 3%

B = beta i.e. 1.34

Rm = expected return on the market i.e. 9%

hence putting the value in the Equation we get,

Re = 3% + 1.34*(9% - 3%)

Re = 3% + 1.34 * 6%

Re = 3% + 8.04%

Re = 11.04%

Hence the answer will be B) 11.04%