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14 September, 04:14

In February 2017 the risk-free rate was 4.97 percent, the market risk premium was 7 percent, and the beta for Twitter stock was 1.40. What is the expected return that was consistent with the systematic risk associated with the returns on Twitter stock?

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  1. 14 September, 07:44
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    14.77%

    Explanation:

    In this question, we apply 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)

    = 4.97% + 1.40 * 7%

    = 4.97% + 9.8%

    = 14.77%

    The (Market rate of return - Risk-free rate of return) is also called market risk premium and the same is shown in the answer
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