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Ivanhoe, Inc., stock has a beta of 1.65. If the expected market return is 17.5 percent and the risk-free rate is 7.5 percent, what does CAPM indicate the appropriate expected return for Ivanhoe stock is

Respuesta :

Shahzaibfaraz

Answer:

r or expected rate of return = 0.0.24 or 24%

Explanation:

Using the CAPM, we can calculate the required/expected rate of return on a stock. This is the minimum return required by the investors to invest in a stock based on its systematic risk, the market's risk premium and the risk free rate.

The formula for required rate of return under CAPM is,

r = rRF + Beta * (rM - rRF)

Where,

  • rRF is the risk free rate
  • rM is the market return

r = 0.075 + 1.65 * (0.175 - 0.075)

r or expected rate of return = 0.0.24 or 24%

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