Calculating Expected Return using CAPM

Consider a portfolio consisting of a risk-free asset and a market portfolio. The risk-free asset has a return of 3%, and the expected market return is projected to be 8%. Furthermore, the beta of the market portfolio is 1. What is the expected return of a stock with a beta of 1.5 using the Capital Asset Pricing Model (CAPM)?

Apply the CAPM formula which is given by:

E(R_i) = R_f + eta_i (E(R_m) - R_f)

where:

E(R_i) = Expected return of the asset
R_f = Risk-free rate
β_i = Beta of the asset
E(R_m) = Expected market return