ANSWER–Study Question of the Week: October 1, 2012 Edition

As a follow up to yesterday’s licensing exam study question (Relevant to Series 65, Series 66, Series 7, and Series 79), here is your question PLUS answer and rationale: Continue reading

As a follow up to yesterday’s licensing exam study question, here is your question PLUS answer and rationale:

Question (Relevant to Series 65, Series 66, Series 7, and Series 79):

Given the following assumptions for stock ABC, what is its expected return using the Capital Asset Pricing Model (CAPM)?

Assumptions: Risk Free Rate: 1%; Expected Return on general stock market: 7%; Beta: 1.; Sharpe Ratio: 2.

Answers:

A. 10%

B. 13%

C. 11.5%

D. 15%

Correct Answer: A

Rationale: The formula for the Capital Asset Pricing Model (CAPM) is given by the following: Return on Stock = Risk Free Rate + Beta of Stock x (Return on Market – Risk Free Rate). Plugging in for Stock ABC gives Return on Stock ABC = 1% + 1.5 x (7% – 1%) = 10%. Note the Sharpe Ratio is not used in the CAPM formula.

*Questions featured in the weekly study question series are sampled from Solomon’s industry-leading Online Exam Simulator.

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