Asked by Nicole Davis on Jul 06, 2024
Verified
What is the expected market return if the expected return on asset A is 16% and the risk-free rate is 7%? Asset A has a beta of 1.2.
A) 9.5%
B) 14.5%
C) 16.5%
D) 17.5%
E) 20.5%
Expected Market Return
The average return anticipated from an investment in a broad market index over a certain period.
Expected Return
The anticipated return on an investment based on the probabilities of possible outcomes.
Risk-Free Rate
The expected earnings from an investment that carries no risk of losing money, typically exemplified by the return on government bonds.
- Know how to find the risk-free rate and market risk premium from given data.
- Familiarize yourself with the notion of beta and its link to an asset's forecasted return.
Verified Answer
CS
Chandler SmithersJul 10, 2024
Final Answer :
B
Explanation :
The expected market return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for the Market Return gives: Market Return = ((Expected Return - Risk-Free Rate) / Beta) + Risk-Free Rate. Plugging in the given values: Market Return = ((16% - 7%) / 1.2) + 7% = 14.5%.
Learning Objectives
- Know how to find the risk-free rate and market risk premium from given data.
- Familiarize yourself with the notion of beta and its link to an asset's forecasted return.