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31 January, 07:10

If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:

A. return on the stock minus the risk-free rate.

B. difference between the return on the market and the risk-free rate.

C. beta times the market risk premium.

D. beta times the risk-free rate.

E. market rate of return.

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Answers (1)
  1. 31 January, 07:28
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    B. difference between the return on the market and the risk-free rate

    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)

    where,

    (Market rate of return - Risk-free rate of return) = Market risk premium

    And all things remain constant.
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