A stock has a beta of 1.3, the risk-free rate is 3% and the market return is 9%. Find the required return using CAPM.

Step 1 — State the model

E(r) = rf + β × (rm − rf)

The bracket is the market risk premium — the extra return the market as a whole is expected to pay over the risk-free rate. Beta scales it to this particular stock.

Step 2 — Work out the market risk premium

rm − rf = 9% − 3% = 6%

Note that the 9% is the whole expected market return, not the premium. Using it directly is the single most common error in this question.

Step 3 — Substitute

E(r) = 3% + 1.3 × 6% = 3% + 7.8% = 10.8%

What the answer says

A beta above 1 means the stock moves more than the market, so it has to offer more than the market's 9% to be worth holding — which is why 10.8% sits above the market return rather than below it.