The capital asset pricing model $($CAPM$)$ gives the required return for an asset given its level of

systematic risk $($beta$).$ The required return is the minimum compensating return an investor should

demand for taking on that level of risk.

However, investors may have different views and expectations about an asset's future performance

beyond just its beta. The expected return is simply an investor's estimate of the probable future return

for that asset based on their analysis and forecasts.

Question: Company XYZ has a beta of $1\mathrm{.}5.$ The risk$-$free rate is $2\%$ and the expected market return is $8\%.$

Using CAPM, calculate the:

$1)$ Required return for XYZ stock

$2)$ If an investor expects XYZ$\text{'}$s stock to return $15\%$ over the next year, is the expected return higher or

lower than the required return calculated in part $1?$

a$)1)$ Required return $=10\%,$ Expected $15\%$ is higher

b$)1)$ Required return $=10\%,$ Expected $15\%$ is lower

c$)1)$ Required return $=14\%,$ Expected $15\%$ is higher

d$)1)$ Required return $=14\%,$ Expected $15\%$ is lower