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 ad1c9bdddf
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 ...
This solution explains how to calculate the rate of return using the capital asset pricing model (CAPM)