Assume the following information about the market and JumpMasters' stock. JumpMasters' beta = 1.50, the risk-free rate is 3.50%. Te market risk premium, i. e. the market return in excess of the risk free rate is 10%. Using the Securities Market Line (SML) in the context of the CAPM, what is the Expected Return for JumpMasters' stock? A. 13.50%B. 27%C. 7.50%D. 18.50%

D. 18.50%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

= 3.50% + 1.5 * (13.50% - 3.50%)

= 3.50% + 1.5 * 10%

= 3.50% + 15%

= 18.50%

The (Market rate of return - Risk-free rate of return) is also known as market risk premium. Since the market risk premium is given i. e 10% so the market rate of return would be 13.50%