The riskfree rate of return is 39 and the expected return on

The risk-free rate of return is 3.9% and the expected return on S&P 500 portfolio is10.1%. What is the expected rate of return on a stock with a beta of 1.21?

Solution

As per CAPM Expected return on stock is expressed as following equation,

Re = Rf + B(Rm - Rf)

where Re = Expected return on Stock

Rf = Risk free rate of return , 3.9%

B = beta , 1.21

Rm = Market risk of return, 10.1%

hence putting the value in equation we get,

Re = 3.9% + 1.21 (10.1% - 3.9%)

Re = 3.9% + 7.502%

Re = 11.402% i.e 11.40%

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