The expected return for a stock calculated using the CAPM is 11.5%. The market return is 8.0% and the beta of the stock is 1.50.
Question
The expected return for a stock calculated using the CAPM is 11.5%. The market return is 8.0% and the beta of the stock is 1.50.
Solution
The question seems to be asking for the risk-free rate. The Capital Asset Pricing Model (CAPM) formula is:
Expected Return = Risk-free rate + Beta * (Market Return - Risk-free rate)
We can rearrange this formula to solve for the risk-free rate:
Risk-free rate = (Expected Return - Beta * Market Return) / (1 - Beta)
Step 1: Convert the percentages to decimals. 11.5% becomes 0.115, 8.0% becomes 0.08, and the beta is 1.50.
Step 2: Substitute the values into the rearranged CAPM formula:
Risk-free rate = (0.115 - 1.50 * 0.08) / (1 - 1.50)
Step 3: Calculate the value:
Risk-free rate = (0.
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