According to CAPM,
Expected return of stock = Risk-free rate + Beta(Market risk - Risk-free rate)
E[r] = 5% + 1.2(10%-5%) = 11%
Note that the 10-year US Treasury bonds are considered the risk-free rate and the S&P 500 return is considered the market return.

Things to Remember

• CAPM (Capital Asset Pricing Model) is a widely-used method to determine the expected return on an investment based on its risk and the overall market return.
• Beta measures the sensitivity of a stock's returns to the market returns. A beta of 1 indicates that the stock's returns move in line with the market.
• The risk-free rate is the theoretical rate of return of an investment with zero risk, typically represented by government bonds.
• The market risk premium is the excess return expected from an investment in the market over the risk-free rate.
• Expected return on a stock can be calculated using the formula: Expected return = Risk-free rate + Beta(Market risk premium).