NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
According to the Capital Asset Pricing Model, a stock has a beta of 1.4, the risk-free rate is 6% and the expected market return is 11%. What is the required return on the stock?
The required return is 13%. CAPM adds the risk-free rate of 6% to beta times the market risk premium: 1.4 multiplied by 5% gives 7%, so the total is 13%. The premium is the market return minus the risk-free rate, not the market return itself.
- A13.0%Correct
- B15.4%
- C11.0%
- D7.4%
Explanation
Required return = Rf + beta × (Rm − Rf) = 6 + 1.4 × 5 = 13%. The 15.4% figure results from multiplying beta by the market return and adding Rf (6 + 1.4×11 wrongly... after omission of subtraction). 7.4% comes from using beta × 1% mistakes. Only 13% is correct.
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