Calculate the expected return of a stock with a beta of 1.5, given a risk-free rate of 2% and expected market return of 7%.

The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return of an asset (in this case, a stock) based on its risk relative to the overall market. The formula for CAPM is:

E(R_i) = R_f + β_i(E(R_m) − R_f)

where:

- E(R_i) is the expected return of the stock

- R_f is the risk-free rate

- β_i is the beta of the stock (a measure of the stock’s volatility relative to the market)

- E(R_m) is the expected market return

In this case, we are given a beta (β_i) of 1.5, a risk-free rate (R_f) of 2%, and an expected market return (E(R_m)) of 7%. Plugging these values into the CAPM formula, we get:

E(R_i) = 0.02 + 1.5(0.07 − 0.02)

E(R_i) = 0.02 + 1.5 × 0.05

E(R_i) = 0.02 + 0.075

E(R_i) = 0.095

So the expected return of the stock with a beta of 1.5 is 9.5%.