Respuesta :
The expected return of a security with a beta of 1.2 is 13.6%
Required rate of return = Risk-free rate + (Market return - Risk-free rate) x Beta
4%+1.2(12% - 4% )=13.6%
Why does the expected return rise as the beta increases? What is the CAPM?
The capital asset pricing model, or CAPM, is a method of calculating the required rate of return on a security from the viewpoint of the market. The CAPM describes the relationship between systematic risk, or the general dangers of investing, and expected return for assets, particularly stocks. The CAPM was developed as a way to quantify this systematic risk. In the financial sector, it is widely used to appraise risky securities and determine predicted returns for assets given their risk and cost of capital.
The systemic risk can be measured using the beta coefficient. The market may be engaging in more risk as this indicator rises, in which case investors should increase their needed rate of return.
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