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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory

The risk-free rate is 7%, the expected market return is 13% and a stock has a beta of 1.5. According to CAPM, the required return on the stock is:

The required return is 16%. CAPM adds the risk-free rate of 7% to beta times the market risk premium. The premium is 13% minus 7%, which is 6%, and 1.5 times 6% gives 9%, so 7% plus 9% equals 16%.

  1. A16.0%Correct
  2. B20.0%
  3. C19.5%
  4. D14.5%

Explanation

Required return = 7% + 1.5 x (13% - 7%) = 7% + 9% = 16%. Option 19.5% wrongly applies beta to the market return (1.5 x 13%). Option 20% adds the 13% market return to 7%. Option 14.5% is 1.5 x 7% + 4%, wrong.

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