Suppose the beta of Microsoft is 1.13, the risk-free rate is 3 percent, and the market risk premium is 8 percent. Calculate the expected return for Microsoft.

8.65%

Explanation:

Rj = Rf + risk premium.

Rj = Rf + β[E(RM − Rf)].

= 3 + 1.13 (8 - 3)

= 3 + 1.13 x 5

= 3 + 5.65

= 8.65 percent

This relationship between risk and expected return is called the security market line.

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