NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
Using CAPM, a stock has beta 1.2, the risk-free rate is 7% and the expected market return is 12%. What is the required return on the stock?
The required return is 13%. CAPM gives risk-free rate plus beta times the market premium: 7% plus 1.2 times 5%, which equals 7% plus 6%, so the stock should earn 13% to compensate for its systematic risk.
- A12.0%
- B13.0%Correct
- C14.4%
- D8.4%
Explanation
Required return = 7% + 1.2 × (12% − 7%) = 7% + 6% = 13%. Option 14.4% multiplies beta by the market return without subtracting the risk-free rate (1.2×12). Option 8.4% is 1.2×7.
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