Tar Heel Blue, Inc. has a beta of 1.8 and a standard deviation of 28%. The risk free rate is 1.5% and the market expected return is 7.8%. According to the CAPM, what is the expected return on Tar Heel Blue? Enter you answer without a % symbol (for example, if your answer is 8.9% then type 8.9).

Question

Business

Tiffany Long

12 June, 22:57

Tar Heel Blue, Inc. has a beta of 1.8 and a standard deviation of 28%. The risk free rate is 1.5% and the market expected return is 7.8%. According to the CAPM, what is the expected return on Tar Heel Blue? Enter you answer without a % symbol (for example, if your answer is 8.9% then type 8.9).

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Answers (1)

Know the Answer?

Alec Buck · Answer 1

12.84

Explanation:

In this question, we use the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

= 1.5% + 1.80 * (7.8% - 1.5%)

= 1.5% + 1.80 * 6.3%

= 1.5% + 11.34%

= 12.84

Since the standard deviation is not relevant. Hence, ignored it