Expected Return on ABX Stock Calculation under CAPM
What is the expected return on ABX stock using the CAPM?
Based on the given data, what is the expected return for ABX stock calculated using the Capital Asset Pricing Model (CAPM)?
Expected Return on ABX Stock Calculation
The expected return on ABX stock using the CAPM is 0.085.
The Capital Asset Pricing Model (CAPM) is a widely used method to determine the expected return on a particular stock based on its risk and market conditions. In this case, we are looking to find the expected return for ABX stock.
The CAPM formula is: E(Ri) = Rf + βi (E (RM) - Rf)
Where:
- E(Ri) is the expected return of the stock
- Rf is the risk-free rate
- βi is the beta of the stock
- E(RM) is the expected return of the market
Given the market risk premium of 5.8%, the risk-free rate of 2.1%, the standard deviation of returns on the market portfolio of 0.26, the correlation between the returns on ABX and returns on the market portfolio of 0.7, and the standard deviation of returns on ABX stock of 0.35, the expected return of ABX stock can be calculated as follows:
E(Ri) = 2.1% + 0.7 (5.8% - 2.1%) = 0.085
Therefore, the expected return on ABX stock using the CAPM is 0.085.