The expected return on the S&P/ASX 200 stock market index is 12% and the risk-free rate is 5%

Finance Aug 05, 2020

The expected return on the S&P/ASX 200 stock market index is 12% and the risk-free rate is 5%. What is the expected return on the investment with a beta of: (a) 0.2, (b) 0.5, and (c) 1.4?

Expert Solution

a). Computation of the expected return:-

Expected return = Risk free rate + Beta * (Expected market return - Risk free rate)

= 5% + 0.2 * (12% - 5%)

= 5% + (0.2 * 7%)

= 5% + 1.4%

= 6.40%

b). Computation of the expected return:-

Expected return = Risk free rate + Beta * (Expected market return - Risk free rate)

= 5% + 0.5 * (12% - 5%)

= 5% + (0.5 * 7%)

= 5% + 3.5%

= 8.50%

c). Computation of the expected return:-

Expected return = Risk free rate + Beta * (Expected market return - Risk free rate)

= 5% + 1.4 * (12% - 5%)

= 5% + (1.4 * 7%)

= 5% + 9.8%

= 14.80%

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