Single choice7)Assume that the risk-free rate is 3% and the market risk premium is 5%, therefore a security with a beta of 1.5 should have an expected return closest to:0.1050.0850.06
Question
Single choice7)Assume that the risk-free rate is 3% and the market risk premium is 5%, therefore a security with a beta of 1.5 should have an expected return closest to:0.1050.0850.06
Solution
The expected return on a security can be calculated using the Capital Asset Pricing Model (CAPM), which is expressed as:
Expected Return = Risk-Free Rate + Beta * Market Risk Premium
Given in the question, the risk-free rate is 3% or 0.03 (in decimal form), the market risk premium is 5% or 0.05 (in decimal form), and the beta of the security is 1.5.
Substituting these values into the CAPM equation gives:
Expected Return = 0.03 + 1.5 * 0.05 = 0.03 + 0.075 = 0.105 or 10.5%
So, the expected return on a security with a beta of 1.5, given a risk-free rate of 3% and a market risk premium of 5%, is closest to 0.105 or 10.5%.
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