If the risk-free rate is 2%, the expected market return is 8%, and a stock has a beta of 1.5, what is the CAPM expected return?

• A. 11%
• B. 8%
• C. 2%
• D. 14%

Answer: (C)

CAPM says an asset’s expected return equals the risk-free rate plus a risk premium that scales with the asset’s market beta. The market risk premium is the extra return investors require for taking on market risk, which is the difference between the expected market return and the risk-free rate. Here, the market risk premium is 8% − 2% = 6%. With a beta of 1.5, the stock’s risk premium is 1.5 × 6% = 9%. Adding the risk-free rate gives 2% + 9% = 11%. So the CAPM expected return is 11%. This aligns with the idea that higher beta increases the expected return because the stock is more sensitive to market movements; the other numbers would require different beta or risk premium than the given values.