Question

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.)

Answer 1

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

$Expected Return = 2.00\% + (2.50 * 7.00\%)$

$Expected Return = 19.5\%$