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The correlation of stock XYZ with the market is 0.5 and its standard deviation is 40%. According to the CAPM the expected return on XYZ should be A) 10% B) 15% C) 20% D) 18.7%

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abiolataiwo2015

According to the CAPM the expected return on XYZ should be:  C) 20%.

Expected return

Using this formula

Expected return= Market correlation of  stock x Standard deviation

Where:

Market correlation of stock=0.5

Standard deviation=40%

Let plug in  the formula

Expected return=0.5×40%

Expected return=20%

Inconclusion  According to the CAPM the expected return on XYZ should be:  C) 20%.

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