FRM Part II · FRM Exam Part II · Factors
The risk-free rate is 3%, the expected market return is 9%, and a stock has a beta of 1.4. Using the CAPM, what is the stock's expected return?
The CAPM expected return is 11.4%. The market risk premium is 6% (9% minus 3%), multiplied by a beta of 1.4 gives 8.4%, which is added to the 3% risk-free rate to give the required return.
- A11.4%Correct
- B12.6%
- C9.0%
- D13.4%
Explanation
Expected return = 3% + 1.4 × (9% − 3%) = 3% + 8.4% = 11.4%. Option 12.6% multiplies beta by the market return and omits the risk-free rate adjustment (1.4 × 9%). Option 13.4% adds beta times the market return to rf incorrectly: 3% + 1.4×... mis-specified. 9% ignores beta.
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