Assume the beta on Royalty Pharma's portfolio of assets is 1, the risk-free rate is 0.5% per year, and the market portfolio’s risk premium is 6% per year. According to the CAPM, what is Royalty Pharma's expected return? (Note: Your answer should be a number in percentage form. Do not enter '%'.)
According to the Capital Asset Pricing Model (CAPM), the expected return can be calculated using the following formula:
Expected Return = Risk-free rate + Beta * Market risk premium
Given that the beta is 1, the risk-free rate is 0.5% per year, and the market risk premium is 6% per year, we can calculate the expected return as follows:
Expected Return = 0.5% + 1 * 6%
Expected Return = 0.5% + 6%
Expected Return = 6.5%
Therefore, Royalty Pharma's expected return, according to the CAPM, is 6.5%.
To calculate Royalty Pharma's expected return using the Capital Asset Pricing Model (CAPM), we will use the formula:
Expected Return = Risk-Free Rate + Beta * Market Risk Premium
Given information:
- Beta (β) = 1
- Risk-Free Rate = 0.5% per year
- Market Risk Premium = 6% per year
Let's substitute the values into the formula:
Expected Return = 0.5% + 1 * 6%
Expected Return = 0.5% + 6%
Expected Return = 6.5%
Therefore, Royalty Pharma's expected return, according to the CAPM, is 6.5%.