Calculating Expected Return using CAPM
Understanding CAPM and Expected Return
The Capital Asset Pricing Model (CAPM) calculates the expected return of a stock based on its beta, the expected return of the market portfolio, and the risk-free rate.
Calculating Expected Return with CAPM
The formula for the expected return using CAPM is:
Expected Return = Risk-free rate + Beta × (Expected market return - Risk-free rate)
Given:
Risk-free rate = 1.6%
Expected market return = 9.6%
Beta = 0.5
Plugging in the values:
Expected Return = 1.6% + 0.5 × (9.6% - 1.6%)
Calculating:
Expected Return = 1.6% + 0.5 × 8%
Expected Return = 1.6% + 4%
Expected Return = 5.6%
Therefore, the expected return predicted by the CAPM for a stock with a beta of 0.5 is 5.6%.
What expected return is predicted by the CAPM for a stock with a beta of 0.5? Enter answer in percents. The expected return predicted by the CAPM for a stock with a beta of 0.5 is 5.6%.