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19 August, 05:52

Apple has a Beta of 1.25. Assume that the risk-free rate of interest is 3% and that you expect the stock market will return 8% over the next year. According to the Capital Asset Pricing Model (CAPM), the expected return of Apple is

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  1. 19 August, 07:44
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    9.25%

    Explanation:

    The computation of the expected return under the Capital Asset Pricing Model (CAPM) is shown below:

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

    = 3% + 1.25 * (8% - 3%)

    = 3% + 1.25 * 5%

    = 3% + 6.25%

    = 9.25%

    The (Market rate of return - Risk-free rate of return) is also known as the market risk premium
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