CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Assume the risk-free interest rate is 7% and the market return is 12%. If the beta of a stock is 1.4, according to CAPM, what is the required rate of return on the stock?

A. 7%
B. 9.5%
C. 14%
Correct Answer: C

According to CAPM, the required return is 7 + (12 - 7) x 1.4 = 14%.

User Contributed Comments 14

User Comment
Gina 16.8%
oogie No it's 14
Will1868 yes it is 14, k = E(r)= Rf + B(Rm - Rf)
rockeR I really wonder how Gina get 16.8%.
Should be genius or...
nufan She did 12*1.4.. and she was wrong.
Nightsurfer This'll sound strange, but when I keyed the numbers into my TI BA II Plus Professional in % form, I got Gina's answer. Something goes wonky in the calculation when you enter the second % variable.
merrick me too! 16.8
CRickert In 5th grade they teach a little riddle that is (Please Excuse My Dear Aunt Sally) which stands for Parenthesis, Exponents, Multiplication, Division, Addition, Subtraction. You have to do it in that order.
The 16.8 number you are getting is by adding the risk free rate and the market risk premium before multiplying the beta.
kutta2102 I remember reading in the calculator's manual that there is a setting to change the way the inputs are interpreted by the calculator. The default settings require the user to understand CRickert's rule (which in my opinion would go a long way to avoid future problems). However, these settings can be changed
aree Thankyou CRickert
DonAnd Another mnemonic is BODMAS(Brackets of Division, Multiplication, Addition and Subtraction)
Creep BEDMAS : Brackets. Exponents. Division. Multiplication. Addition. Subtraction.
johntan1979 Well, good luck, to whoever needs to think of these things in a CFA exam. Time is of essence.
tichas you really dont need a calculator to work this out.
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