# Rate of return

A stock has a beta of 1.6, the risk free rate is 4% and the expected market return is 10%. What is the required rate of return using the CAPM model? If the expected return for the stock is 14%, would you recommend purchasing the shares now? Explain your answer in detail.

© BrainMass Inc. brainmass.com October 9, 2019, 11:41 pm ad1c9bdddfhttps://brainmass.com/economics/finance/rate-return-using-capm-264866

#### Solution Preview

We first calculate the required rate of return using CAPM

Required rate of return = Rf + (Rm-Rf) beta

Where Rf = risk free rate = 4%, Rm = market return = 10% and beta = 1.6

Required rate of return = 4% + (10%-4%) 1.6 = 13.6%

The expected rate of return is 14%. The stock ...

#### Solution Summary

This solution explains how to calculate the rate of return using the capital asset pricing model (CAPM)

$2.19