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FIN253 Fundamentals Of Investment

Fundamentals Of InvestmentTU Board 2080

What is the expected return on a stock with a beta of 1.15 a market risk premium of 6 percent and a risk free return of 5 percent?

2

Answer

Padhai · Based on the official syllabus and past papers
Updated 10 Oct 2026

The expected return on a stock can be calculated using the Capital Asset Pricing Model (CAPM) formula:

$E (R_{i}) = R_{f} + β_{i} \times (E (R_{m}) - R_{f})$

Where:

$E (R_{i})$ = Expected return on the stock
$R_{f}$ = Risk-free return = 5%
$β_{i}$ = Beta of the stock = 1.15
$E (R_{m})$ = Expected market return (risk-free return + market risk premium) = 5% + 6% = 11%

Substituting the values:

$E (R_{i}) = 5% + 1.15 \times (11% - 5%)$ $E (R_{i}) = 5% + 1.15 \times 6%$ $E (R_{i}) = 5% + 6.9%$ $E (R_{i}) = 11.9%$

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