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Your estimate of the market risk premium is 7​%. The​ risk-free rate of return is 3.3​% and General Motors has a beta of 1.3. According to the Capital Asset Pricing Model​ (CAPM), what is its expected​ return?

Respuesta :

TomShelby

Answer:

COst of equity using CAPM = 12.4%

Explanation:

the market premium is the diference between the market rate and the risk-free rate.

We plug the values into the formula for CAPM and solve for cost of equity

[tex]Ke= r_f + \beta (r_m-r_f)[/tex]  

risk free 0.033

premium market = (market rate - risk free) 0.07

beta(non diversifiable risk) 1.3

[tex]Ke= 0.033 + 1.3 (0.07)[/tex]  

Ke 0.12400 12.4%

The expected return will be 12.4%

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