Question

Suppose the expected market return is 14%, the volatility of the market is .25, the risk-free rate is 4% and the beta of Yahoo is 3.3. What return does the CAPM predict for Yahoo?

Answer 1

Answer:

r = 0.37 or 37%

Explanation:

CAPM equation helps us to calculate the required rate of return on a stock based on three factors that include risk free rate, market return and beta of the stock.

The beta tells the systematic risk of the stock. The equation for required rate of return (r) is,

r = rRF + β * (rM - rRF)

Thus, using CAPM, the reuired rate of return for Yahoo stock is,

r = 0.04 + 3.3 * (0.14 - 0.04)  => 0.37 or 37%