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Based on the Capital Asset Pricing Model (CAPM) and the diagram below, what is the return of the stock if its beta is 1
Based on the Capital Asset Pricing Model (CAPM) and the diagram below, what is the return of the stock if its beta is 1.2 or 0.8?
10%
3%
Expert Solution
Computation of Return on Stock using CAPM:
Return on stock = Risk-free Rate +Beta*(Risk-free Return -Market Return)
If Beta is 1.2:
Return on stock = 3.5% + 1.2*(12%-3.5%) = 13.70%
If Beta is 0.8:
Return on stock = 3.5% + 0.8*(12%-3.5%) = 10.30%
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