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    Risk, Return, and the Capital Asset Pricing Model

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    Question: Smith & Co. has a beta of 1.30 and an expected dividend growth rate of 5.00% per year. The T-bill rate is 3.00%, and the T-bond rate is 6.00%. The annual return on the stock market during the past 3 years was 15.00%. Investors expect the annual future stock market return to be 12.00%. Using the SML, what is Smith's required return?
    A. 12.5%
    B. 12.8%
    C. 13.1%
    D. 13.5%
    E. 13.8%

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    Solution Preview

    Answer: E. 13.8%

    SML equation is: r A= r f + beta A (r m - r f)
    ...

    $2.19

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