CMA Final · Strategic Financial Management · Asset Pricing Theories
Under CAPM, the risk-free rate is 6% and the expected market return is 14%. A stock of Kaveri Textiles has a beta of 1.25. What is the required return on the stock?
The required return is 16%. CAPM gives risk-free rate plus beta times market risk premium: 6% plus 1.25 times 8%, which is 6% plus 10%. Beta scales only the premium over the risk-free rate, not the whole market return.
- A16.0%Correct
- B17.5%
- C14.0%
- D10.0%
Explanation
Required return = 6% + 1.25 x (14% - 6%) = 6% + 10% = 16%. Option 17.5% results from 1.25 x 14%, which wrongly ignores the risk-free rate and applies beta to the full market return. Option 10% uses only the beta-adjusted premium minus nothing, being 1.25 x 8% without adding Rf.
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
- Under a single-factor APT model, the risk-free rate is 5%, and the factor risk premium is 4%. A portfolio has a factor sensitivity of 1.5. T…
- Under a single-factor APT model, the risk-free rate is 5% and the factor risk premium is 4% per unit of factor sensitivity. Stock Bharat Aut…
- A portfolio has 40% in a risk-free asset yielding 6% and 60% in the market portfolio, which has an expected return of 13%. Under CAPM, what …
- A portfolio has 40% in Stock X (beta 0.9), 35% in Stock Y (beta 1.2) and the remainder in Stock Z (beta 1.6). With a risk-free rate of 5% an…
- A share is priced to give an expected return of 14% under the CAPM. The risk-free rate is 5% and the market risk premium is 6%. Analysts for…
- A stock has beta 1.25 and an expected return of 15%. The risk-free rate is 7%. If the stock is fairly priced under the CAPM, what is the exp…