NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds
A fund has a beta of 1.2. The market is expected to return 12% and the risk-free rate is 5%. According to CAPM, what is the fund's expected return?
The CAPM expected return is 13.4%. Add the risk-free rate of 5% to beta of 1.2 times the market risk premium of 7%, which is 8.4%, giving 13.4 percent.
- A14.4%
- B13.4%Correct
- C12.0%
- D8.4%
Explanation
Expected return = 5 + 1.2 x (12 - 5) = 5 + 8.4 = 13.4%. The 14.4% option multiplies beta by the market return and so ignores the risk-free rate adjustment (1.2 x 12). The 8.4% option leaves out the risk-free rate.
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