7.(Expected rate of return using CAPM)

a.Compute the expected rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 5 percent and the market portfolio (composed of New York Stock Exchange stocks) has an expected return of 12 percent.

b.Why is the rate you computed the expected rate?

Part 1

a.The expected rate of return for Intel common stock is

____%. (Round to one decimal place.)

Part 2

b.Why is the rate you computed the expected rate?

The rate is fair and expected because the CAPM provides a theory of how risk and expected return are connected or traded off in the capital markets.

True/False

(Select from the two)