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Rate of return

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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.

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Solution Summary

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

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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 ...

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