CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models
The risk-free rate is 3%, the expected market return is 9%, and a stock has a beta of 1.20. Using the CAPM, the stock's required return is closest to:
The required return is about 10.2%. CAPM adds the beta-scaled market risk premium to the risk-free rate: 3% plus 1.20 times 6% equals 10.2%. Choosing 7.2% would ignore the risk-free rate, which is a common error.
- A7.2%
- B10.2%Correct
- C12.6%
Explanation
Required return = 3% + 1.20 × (9% − 3%) = 3% + 7.2% = 10.2%. The 7.2% option is only the risk premium, omitting the risk-free rate. The 12.6% option wrongly applies beta to the market return, 3% + 1.2 × 9% = 13.8%, or similar misuse; it is not correct.
Did you get it right without looking?
One question tells you little. A timed set on The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models shows your real accuracy, how long you take and where you lose marks.
More The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models questions
- A manager's portfolio has a positive Jensen's alpha estimated from a regression of excess portfolio returns on excess market returns. The al…
- An analyst regresses a stock's monthly returns on market returns and obtains a raw beta of 1.40. Using the Blume adjustment with weights of …
- An analyst estimates a stock's cost of equity using the capital asset pricing model. The risk-free rate is 3.0%, the equity risk premium is …
- A stock has a covariance with the market return of 0.0360. The market return has a standard deviation of 20%. The stock's estimated beta is …
- In an APT framework, if an asset's expected return is higher than the return implied by its factor sensitivities, arbitrageurs will most lik…
- An analyst estimates a stock's beta using a market model regression. The covariance of the stock's returns with the market's returns is 0.03…