# finance - using CAPM [closed]

The risk-free rate is 4%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model:

a. What is the risk premium on the market?

b. what is the required return on an investment with a beta of 1.5?

c. if the expected return on stock X is 11.2%, what is its beta, according to the capital asset pricing model?

## closed as off-topic by Bob Jansen♦Nov 18 '14 at 11:41

This question appears to be off-topic. The users who voted to close gave this specific reason:

• "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – Bob Jansen
If this question can be reworded to fit the rules in the help center, please edit the question.

The CAPM states that $$E[r-r_f] = \beta E[r_M-r_f],$$ thus $$E[r] = r_f + \beta E[r_M-r_f],$$ where $r$ is the return of the asset and $r_M$ is the market return, $r_f$ is the risk free rate. Thus you have to substract the risk free rate from the expectations as $E[r-r_f] =E[r]-r_f$. The answers are
1. $8\%$ as in the other answer
2. $4\% + 1.5* 8\% = 16\%$
3. $11.2\%-4\% =\beta*8\%$ thus $\beta=0.9$.