Financial Risk Manager Part 1
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Q.193 John Powel gathers the following information regarding the stock of Swisscom, an internet service provider:
- Beta for Swisscom = 0.8
- Risk-free rate = 5%
- Powel's expected rate of return for Swisscom = 7%
Use this information to determine the expected market return.
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TTanishq
A
8%
B
12%
C
7.5%
D
5%
Explanation:
Explanation
According to the Capital Asset Pricing Model (CAPM):
Where:
- = Expected return on asset i = 7%
- = Risk-free rate = 5%
- = Expected market return (what we're solving for)
- = Beta of asset i = 0.8
Substituting the given values:
Solving step by step:
Therefore, the expected market return is 7.5%.
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