Back out the market premium, then price a stock
The risk-free rate is 2%. Stock A is fairly priced with beta 0.8 and an expected return of 8.2%. Stock B, also fairly priced by the same CAPM, has beta 1.5. What expected return should Stock B command? (in percent, to 2 decimals)
Show hints (2)+
- First solve Stock A for the market premium: (E[r_A] − r_f)/β_A.
- Then E[r_B] = r_f + β_B × premium.
Answer
Reveal answer →Final answer
13.63 (± 0.02)
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