Calculate the Expected Return on ABX Stock Under the CAPM

What is the expected return on ABX stock under the CAPM?

Is there any relationship between the returns on ABX stock and the market portfolio?

Expected Return on ABX stock under the CAPM

The expected return on ABX stock under the Capital Asset Pricing Model (CAPM) is 8.91%.

The correlation between the returns on ABX stock and returns on the market portfolio is 0.7.

The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return on investment. It is based on the idea that investors are risk-averse and will only invest in an asset if the expected return compensates them for the risk they are taking.

The formula for the CAPM is:

Expected Return = Risk-free rate + Beta * (Market risk premium)

Given the provided data, we can calculate the expected return on ABX stock as follows:

Expected Return = 2.4% + 0.7 * (8.3%)

Expected Return = 8.91%

This calculation assumes that the Beta for ABX stock is 0.7. The correlation between the returns on ABX stock and returns on the market portfolio is 0.7, indicating a positive relationship between the two.

The correlation between two assets measures the extent to which their returns move together. In this case, a correlation of 0.7 means that when the market goes up, ABX stock is likely to go up as well, but not necessarily to the same extent.

Overall, the CAPM provides insights into the relationship between risk and return in the stock market. By utilizing this model, investors can assess whether ABX stock is expected to provide adequate compensation for the associated risk.