NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
A stock has a beta of 1.2, the risk-free rate is 7% and the expected market return is 12%. Using CAPM, what is the required return on the stock?
The required return is 13%. Under CAPM, the market risk premium is 12% minus 7%, which is 5%. Multiplying by beta of 1.2 gives 6%, and adding the 7% risk-free rate produces 13%.
- A13.0%Correct
- B12.0%
- C14.4%
- D19.0%
Explanation
CAPM: Rf + beta x (Rm - Rf) = 7 + 1.2 x 5 = 13%. Option 14.4% is beta times market return (1.2 x 12), forgetting the risk-free adjustment. Option 19% adds beta times 5 plus 12 incorrectly... it uses Rm + premium.
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