Expected Return Calculation Using CAPM Model

What is the expected return on ABX stock under the CAPM model?

Based on the given data, what factors contribute to determining the expected return on ABX stock?

Expected Return on ABX Stock:

The expected return on ABX stock under the CAPM model is approximately 0.148 or 14.8% when rounded to three decimal places.

The expected return represents the anticipated return that investors can expect from an investment, taking into account various risk factors and market conditions.

To calculate the expected return on ABX stock under the CAPM model, we first need to determine the Beta for the stock. The Beta is a measure of the stock's volatility in relation to the overall market.

Using the given correlation, standard deviation of ABX stock, and standard deviation of the market portfolio, we can calculate the Beta for ABX stock:

Beta = (Correlation * Standard Deviation of ABX Stock) / Standard Deviation of the Market Portfolio

Inserting the values into the formula:

Beta = (0.78 * 0.31) / 0.12
Beta ≈ 2.02

Once we have calculated the Beta for ABX stock, we can proceed to calculate the expected return using the CAPM formula:

Expected Return = Risk-Free Rate + (Beta * Market Risk Premium)

Substitute the values into the formula:

Expected Return = 0.017 + (2.02 * 0.065)
Expected Return ≈ 0.017 + 0.1313
Expected Return ≈ 0.1483

It is important to note that the expected return reflects the compensation investors require for taking on additional risk associated with an investment. In this case, the expected return on ABX stock is calculated based on its volatility and correlation with the market portfolio.