In February 2017 the risk-free rate was 4.97 percent, the market risk premium was 7 percent, and the beta for Twitter stock was 1.40. What is the expected return that was consistent with the systematic risk associated with the returns on Twitter stock?

Question

Business

Amirah Franco

7 November, 12:21

In February 2017 the risk-free rate was 4.97 percent, the market risk premium was 7 percent, and the beta for Twitter stock was 1.40. What is the expected return that was consistent with the systematic risk associated with the returns on Twitter stock?

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Answers (1)

Know the Answer?

Shea Osborn · Answer 1

14.77%

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)

= 4.97% + 1.40 * 7%

= 4.97% + 9.8%

= 14.77%

The (Market rate of return - Risk-free rate of return) is also called market risk premium and the same is shown in the answer