The risk-free rate and the expected market rate of return are 3% and 10%, respectively

Finance Dec 25, 2020

The risk-free rate and the expected market rate of return are 3% and 10%, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 2 is equal to O 17% O 12% O 21% O 6%

Expert Solution

We know that, as per CAPM model;

Expected rate of return: Risk free rate + Beta * ( Market rate of return - Risk free rate)

Expected rate of return: 0.03 + 2 * ( 0.10 - 0.03)

Expected rate of return: 0.03 + 0.14

Expected rate of return: 0.17 or 17%

17%

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