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29 May, 06:29

Suppose the beta of Microsoft is 1.13, the risk-free rate is 3 percent, and the market risk premium is 8 percent. Calculate the expected return for Microsoft.

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  1. 29 May, 09:02
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    8.65%

    Explanation:

    Rj = Rf + risk premium.

    Rj = Rf + β[E (RM - Rf) ].

    = 3 + 1.13 (8 - 3)

    = 3 + 1.13 x 5

    = 3 + 5.65

    = 8.65 percent

    This relationship between risk and expected return is called the security market line.
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