CMA Final · Strategic Financial Management · Asset Pricing Theories
Risk-free return is 6%, expected market return is 12% and a stock has a beta of 1.5. Using CAPM, what is the required return on the stock?
The required return is 15%. Under CAPM, the market risk premium is 12% minus 6%, which is 6%. Multiplying by beta of 1.5 gives 9%, and adding the 6% risk-free rate gives 15% as the required return.
- A15%Correct
- B18%
- C9%
- D16.5%
Explanation
CAPM: Ke = Rf + beta x (Rm - Rf) = 6% + 1.5 x 6% = 15%. The 18% option wrongly applies beta to the market return (1.5 x 12%) and ignores the risk-free rate.
Did you get it right without looking?
One question tells you little. A timed set on Asset Pricing Theories shows your real accuracy, how long you take and where you lose marks.
More Asset Pricing Theories questions
- The risk-free rate is 7% and the expected return on the market portfolio is 13%. Under the CAPM, what is the required return on a stock of S…
- A stock has an expected return of 15% and a beta of 1.2. The risk-free rate is 7% and the market return is 13%. Under the Security Market Li…
- Under a single-factor APT model, the risk-free rate is 7% and the factor risk premium is 5% per unit of factor sensitivity. Asset Z has a fa…
- A stock has a beta of 1.4. The risk-free rate is 6% and the expected return on the market portfolio is 11%. Under CAPM, what is the required…
- The risk-free rate is 6% and the expected market return is 12%. Using the Capital Asset Pricing Model, what is the required return on a shar…
- The risk-free rate is 6% and the market return is 13%. A portfolio is made up of 40% in the risk-free asset, 30% in the market portfolio and…