To calculate the expected return of a stock using the Capital Asset Pricing Model (CAPM), we can use the following formula:
\[ \text{Expected Return} = R_f + \beta (R_m - R_f) \]
where:
- \( R_f \) is the risk-free rate,
- \( \beta \) is the beta of the stock,
- \( R_m \) is the expected return on the market.
Given:
- \( R_f = 2.96% = 0.0296 \)
- \( R_m = 11.23% = 0.1123 \)
- \( \beta = 1.23 \)
Now we can plug these values into the CAPM formula:
\[ \text{Expected Return} = 0.0296 + 1.23 \times (0.1123 - 0.0296) \] \[ = 0.0296 + 1.23 \times 0.0827 \] \[ = 0.0296 + 0.1017131 \] \[ = 0.1313131 \]
Now, converting this back to percentage terms:
\[ \text{Expected Return} = 0.1313131 \times 100 \approx 13.13% \]
Thus, the expected return of the stock will be approximately 13.13%.
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