Accredited Wealth Management Advisor Practice Exam

Question: 1 / 400

Using the capital asset pricing model, what is the expected return of XYZ stock if risk-free rate is 3% and market return is 10%?

12.20%

12.80%

To determine the expected return of XYZ stock using the Capital Asset Pricing Model (CAPM), you must utilize the formula:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate).

The risk-free rate is given as 3%, and the market return is 10%. However, beta, which measures the stock's volatility in comparison to the market, is not provided in your question. To arrive at the choice of 12.80%, it can be inferred that a beta value is being utilized in the calculation.

Assuming a beta of 1.0 (indicating that XYZ stock moves with the market), the calculation would be:

Expected Return = 3% + 1 * (10% - 3%)

Expected Return = 3% + 7%

Expected Return = 10%.

Since 10% does not match option B, it's likely that a different beta is being applied. If we consider a beta that results in a larger expected return, say 1.4, the calculation would be:

Expected Return = 3% + 1.4 * (10% - 3%)

Expected Return = 3% + 1.4 * 7%

Expected

Get further explanation with Examzify DeepDiveBeta

9.17%

13.20%

Next Question

Report this question

Download Accredited Wealth Management Advisor Practice Exam PDF Study Guide
Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy