Answer:
Expected rate of return= 21.8
%
Explanation:
The capital asset pricing model is a risk-based model for estimating the return on a stock.. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. Systematic risks are those which affect all economic actors in the market, they include factors like changes in interest rate, inflation, etc. The magnitude by which a stock is affected by systematic risk is measured by beta.
Under CAPM,
E(r)= Rf + β×(Rm-Rf)
E(r)- expected return- ?
Rf-risk-free rate- 5%
β= Beta - 1.4
(Rm-Rf)
- 12
E(r) = 5% + 1.4× (12%)= 21.8
%
Expected rate of return= 21.8
%
