The rate of return for a market portfolio of risky assets is 7.00%, and its corresponding beta is 2.50. In addition, a risk-free option has a return rate of 2.00%. According to the Capital Asset Pricing Model (CAPM), what expected rate of return (in percentage terms) should any risky asset offer? (Round to two decimals, if necessary.)
Under CAPM, the expected return on a security is equal to a risk premium determined by beta of the security, plus the risk free return .
"Expected Return = Risk Free Rate +(Beta * Market Risk Premium)"
Therefore
"Expected Return = 2.00\\% + (2.50 * 7.00\\%)"
"Expected Return = 19.5\\%"
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