Capital Asset Pricing Model) Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 4 percent, and the expected return for the market is 10 percent. What should be the expected rate of return for each investment (using the CAPM) ?

Using the expected rate of return we have this formula:

Treasury bills are the risk free 4% investment and market rate is 10%

assuming that of the secuirty is 1.2

Beta is the how much return of market premuim we want from security

market premuim = Rm-Rf

CAPM = Rf + (Rm-Rf) * beta

CAPM = 4% + (10-4%) * 1.2

CAPM = 11.2%

So the expected rate of return is 11.2% for security A whose beta is 1.2