The risk-free rate is 3%. The beta is 1.4, the alpha is 0.6 and the average return is 12%. What is the market return? How is it calculated?

9.00%

Explanation:

In  a bid to determine the market return, we make use of the formula for average return  provided below whereby the formula is rearranged in order to market return the subject of the formula as shown thus:

Average return = Alpha + rf + β * (rm - rf)

Average return=12%

Alpha=0.6%

rf=risk-free rate=3%

β=Beta=1.4

rm=market return=the unknown

12%=0.6%+3%+1.4*(rm-3%)

12%=0.6%+3%+1.4rm-4.20%

12%=3.6%+1.4rm-4.20%

12%-3.6%+4.20%=1.4rm

12.60%=1.4rm

rm=12.60%/1.4

rm=9.00%

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