Financial Risk Manager Part 1
Get started today
Ultimate access to all questions.
Deep dive into the quiz with AI chat providers.
We prepare a focused prompt with your quiz and certificate details so each AI can offer a more tailored, in-depth explanation.
You have been provided with the following information regarding the stock of Translink, an international air transport company:
- Risk-free rate = 3%
- Expected market risk premium = 5%
- Translink beta = 1.5
Use the capital asset pricing model to determine the expected return of Translink.
Other
Community
TTanishq
A
7.5%
B
10.5%
C
6%
D
8%
Explanation:
Explanation
According to the Capital Asset Pricing Model (CAPM), the expected return on an asset is given by:
Where:
- = Risk-free rate = 3%
- = Expected market risk premium = 5%
- = Beta for the stock = 1.5
Substituting the values:
Key Points:
- The expected market risk premium is already given as 5%, so we don't need to calculate it separately
- The beta of 1.5 indicates the stock is 50% more volatile than the market
- The calculation shows Translink's expected return is 10.5% to compensate for its systematic risk
Comments
Loading comments...