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EFFE stock has a beta of +1.5. The expected market rate of return is 10% and the risk-free rate of return is 2%. The standard deviation of returns is 1%. Using the Capital Asset Pricing Model (CAPM), what is the expected rate of return for EFFE stock?

Respuesta :

Answer:

The expected rate of return for EFFE stock is 14%.

Explanation:

In this question, we use the Capital Asset Pricing Model formula which is shown below:

Expected rate of return = Risk-free rate of return + Beta × (expected market rate of return - risk-free rate of return

where,

Risk-free rate of return is 2%

Beta is 1.5

Expected market rate of return is 10%

Now put these values to the above formula

So, the answer would be

= 2% + 1.5 × (10% - 2%)

= 2% + 1.5 ×8

= 2% + 12%

= 14%

The standard deviation is irrelevant. Thus, it is not considered in the computation part

Hence, the expected rate of return for EFFE stock is 14%.

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