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Pedro wants to calculate the expected rate of return for security for his work as a freelance investment banker
Pedro wants to calculate the expected rate of return for security for his work as a freelance investment banker. He has the following figures to calculate CAPM: the risk-free interest rate is 2%, the expected return of the market is 14%, and the risk index of the security is 1.35.
Expert Solution
| Expected rate of return |
| Using the CAPM Approach, the Expected rate of return = Risk-free rate + Beta(Market rate of return - Risk-free rate) |
| Expected rate of return = Rf + Beta(Rm - Rf) |
| Expected rate of return = 2.00% + 1.35(14.00% - 2.00%) |
| Expected rate of return = 2.00% + (1.35 x 12.00%) |
| Expected rate of return = 2.00% + 16.20% |
| Expected rate of return = 18.20% |
| Therefore, the expected rate of return for security will be 18.20% |
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