Accredited Wealth Management Advisor Practice Exam

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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%
9.17%
13.20%

The correct answer is: 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